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€ *' 

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BY / 

ELIOT JONES, PhD. ^ ^^^ 

• t 






Copyright, 193 i. 

Set up and electrotyped. Published December, 19a i 


Printed in the United States of America 






This book is a study of the trust problem in the United States. 
It presents an account of the early devices employed to restrain 
competition, and outlines the history and character of the 
modem trust movement; it describes a number of representative 
trusts; it analyzes the reasons for the formation of trusts, and 
their economic and social consequences; it describes the trust 
legislation, the decisions of the courts interpreting it, and the 
dissolution proceedings brought imder it; and, finally, it consid- 
ers (briefly) remedies. 

The book is not a study of all combinations, but merely of 
those combinations that have (or had) monopolistic power, and 
that are properly designated as trusts. It is a study of monopo- 
listic aggregations of capital under unified management. It con- 
tains no discussion of the experience of foreign countries, and 
only a brief (incidental) discussion of the experience of our forty- 
eight states. Material on these subjects was collected, but b 
omitted from the book for want of space, and because of a con- 
viction that the trust problem is a national one, to be settled in 
the light of the conditions of our particular national life. The 
analysis of the six representative trusts is not intended to be 
complete; the aim has been merely to present the data in suf- 
ficient fullness to bring out concretely the reasons for forming 
trusts, the sources of their monopoly power, their tactics, and 
their economic consequences. In general, the history of indi- 
vidual trusts is not carried beyond the date of the dissolution 
proceedings instituted by the Department of Justice of the 
United States. Adequate reliable data for the subsequent history 
of these trusts are not available; and, moreover, the purpose is 
not to present a complete history of the representative trusts, 
but to explain the national policy toward trusts as evidenced 
by our laws and the manner of their enforcement. 



The outstanding feature of the trust problem is its complex- 
ity. In the preface to an earlier book — "The Anthracite Coal 
Combination in the United States" — the author, after a detailed 
study of the facts connected with a particular combination, took 
occasion to emphasize the complex character of the trust ques- 
tion; and time has only served to deepen this early conviction. 
There is, so it would appear, no one solution of the problem; 
for we are confronted by a complex group of issues that must be 
dealt with collectively if any solution is to be had. The method 
of approach to this complicated problem has been that of the sci- 
entij&c investigator. The author would be neither advocate nor 
accuser. We are, in truth, in the grip of mighty forces, — ^forces 
that are modifying fundamentally the world's organization of in- 
dustry; and he would be rash indeed who would venture to pre- 
dict with assurance what the immediate future holds in store 
for us — ^whether regulated competition, regulated monopoly, or 
public ownership in one form or another. Or possibly even some 
new untried venture into hitherto unexplored economic fields. 
The author is therefore content to present primarily a record 
rather than an argument — or a prophecy. 

Grateful acknowledgments are due to my brothers Grinnell 
and Percival, and to Messrs. J. S. Davis, F. B. Garver, C. A. 
Huston, H. L. Lutz, William Notz, C. O. Ruggles, F. W. Taussig, 
A. C. Whitaker, and M. S. Wildman, all of whom read portions 
of the manuscript. But my deepest obligation is to my father. 
Professor Richard Jones, who despite the demands of his own 
rigorous intellectual life has given unstintedly of time and 
counsel, to the end that I should, with Shakespeare, try to 
*find where truth is hid,' and then take lieed lest I * deliver' 
more or less than truth. 


Stanford University 
November, 1920. 





Definition of trust i 

Explanation of fonns of industrial organization a 

SmaU-scale production 3 

Laige-sade production 3 

Combination # 3 

Horizontal 3 

Vertical 3 

Trust 4 

The problem 5 



Some early pools 6 

Definition 6 

Types 7 

Gentlemen's agreement 7 

Speculative pool 8 

Regulation of the output 8 

Cotton bagging 8 

Anthracite coal 8 

Steel rail 9 

Wire nail 10 

Meat-packing 10 

Difficulty with this type of pool 11 

Division of the field 12 

Addyston Pipe and Steel Company 12 

Tobacco 13 

Selling agency 13 

Michigan Salt Association 14 

Continental Wall Paper Company 14 




Patent pool 15 

Electric. IS 

Bath tub 15 

Advantages and disadvantages of pools 16 



Standard Oil "trust" 19 

American Cotton Oil and National Linseed Oil " trusts " 20 

Distillers and Cattle Feeders* "trust" 21 

Sugar Refineries Company 21 

National Lead and Cordage "trusts" 22 

State and federal legislation 23 

Decision in sugar " trust" case 24 

Decision in Standard Oil "trust" case .• 24 

Dissolution scheme of Standard Oil Company 25 




New scheme to restrain competition 27 

Security holding company 27 

Proi>erty owning company 27 

Holding company 27 

Explanation of the term 27 

Changes eflFected 28 

Why resorted to? 28 

Why not resorted to earlier? 29 

Special cases of holding companies 29 

New Jersey legislation 30 

New Jersey's example followed by other states 31 

American Cotton Oil Company 31 

Property owning company 31 

Consolidation or merger 32 

Purchase and sale 34 

Exchange of property for stock 35 

New Jersey legislation 35 

American Tobacco Comjjany 36 

American Sugar Refining Company 36 

Relative merits of seciuity holding companies and property owning 

companies 37 

Extent of trust movement 38 



Early history 46 

Organization of Standard Oil Company of New Jersey 56 

Proportion of output controlled 58 

Sources of monopoly power 60 

Control of crude oil output 60 

Efficiency 61 

Economies of trust form of organization 62 

Ownership of pipe-lines 66 

Railroad discriminations 72 

Unfair methods of competition in selling 77 

Prices .' 83 

Profits 87 



History of acquisition of cane sugar companies 92 

Acquisition of beet sugar interests * 102 

Proportion of output controlled 105 

Sources of monopoly power ' 108 

Economies of trust form of organization 108 

Control of raw material no 

Patents in 

Abuses Ill 

Tariff Ill 

Underweighing 113 

Railroad rebates 114 

Purchase of competitors 115 

Prices 116 

Profits 119 




Organization of cigarette trust 123 

Organization of plug tobacco trust 1 26 

Organization of smoking tobacco trust 129 

Organization of fine-cut tobacco trust 130 

Organization of snuff trust 130 



Attempt to establish a dgar trust 131 

Consolidated Tobacco Company 133 

British-American Tobacco Company 134 

American Tobacco Company (1904) 136 

Proportion of output controlled 138 

Cigarettes and little cigars 138 

Plug tobacco 141 

Smoking tobacco 142 

Fine cut tobacco 143 

Snuff 143 

Cigars 143 

Sources of monopoly power 143 

Leaf, licorice, etc 143 

Railway rebates 145 

Tariff 145 

Economies 146 

Size of plants 146 

Cigarettes 146 

Plug tobacco.% 147 

Smoking tobacco 148 

Snuff 148 

Cigars 148 

Selling and advertising costs 149 

Purchase of supplies 150 

Patents 150 

Local price discrimination — bogus independents 151 

Jobbing business 152 

United Cigar Stores Company 153 

Summary — Purchase of competitors real cause;' 153 

Prices 154 

Profits 161 




Organization of United Shoe Machinery Company 165 

Proportion of industry controlled 165 

Sources of monopoly power 167 

Original act of combination 167 

i Shoe machinery leases 171 

' Advantages of leasing system 174 

'Analysis of tying clauses and their effects 174 

Attitude of shoe machiner>' manufacturers 1 76 



Excellence of machines and service 178 

Effect of monopoly on inventive progress 178 

Plant episode 180 

Royalties 183 

Profits 184 




History of iron and steel industry to 1898 i 

Combination movement, 1898-1900 189 

Description of combinations of 1898-igoo 190 

Explanation of the movement 196 

Organization of United States Steel Corporation 200 

Reasons for its formation 200 

Restriction of competition 200 

Promoters* profits 203 

Eomomies 204 

Importance of the Corporation in 1901 206 

Extent of overcapitalization 207 

Subsequent additions to investment 208 

Profits. 210 

Proportion of output controlled 213 

Explanation of failure to maintain its relative position 218 

Control of iron ore deposits 222 

Ownership of iron ore railroads 223 

Cooperation in fixing prices 225 




Organization of International Harvester Company 231 

Severity of competition 232 

i Integration 234 

^Development of foreign trade 235 

Promoters* profits 235 

Absence of overcapitalization 236 

Extension of its business 237 

Acquisition of competing concerns 237 

Acquisition of noncompeting lines 238 

Organization of International Harvester Corporation 239 

Organization of International Harvester Company of America 240 



Proportion of output controlled 242 

Sources of monopoly power 247 

Economical production 248 

Large financial resources 251 

Competitive practices 251 

Prices 254 

Profits 257 




Introductory 260 

Teaching of experience 261 

I Oil trust 261 

JjSugar trust '262 

*Steel trusts 263 

Tobacco trusts. 266 

Harvester trust 267 

Whisky trusts 268 

Significance of overcapitalization 269 

* Steel trusts 270 

Tobacco trusts 270 

Miscellaneous trusts 271 

Significance of the protective tariff 273 

General reasoning 274 

♦ Law of monopoly price 274 

• How does monopoly price compare with competitive price? 275 

Restraints on high prices of trust controlled articles 276 

Potential competition 276 

Substitutes 278 

Balance of power among trusts. 278 

Public opinion and legislation 279 

Sense of equity and reasonableness 280 

Inert management 280 

Difficulty of determining most profitable price 281 

Conclusion 281 



Function and work of the promoter 283 

Profits realized by promoters of 285 

Iron and steel combinations and trusts, 1898-1900 285 




United States Steel Corporation, 1901 288 

Tobacco trusts, 1890-1904 289 

American Can Company, 1901 292 

International Harvester Company, 1902 293 

Miscellaneous trusts, 1890-1901 296 

Trusts in organization of which promoters' profits were absent 298 

Condusbn 299 



' Introductory 300 

Early cases 300 

Agreements to restrict competition 302 

Invalid agreements 302 

India Bagging Association v. B. Kock and Company 302 

Morris Run Coal Company v. Barclay Coal Comi>any 303 

The Central Ohio Salt Company v. Guthrie 304 

Rajrmond v. Leavitt 304 

De Witt Wire-Cloth Company v. New Jersey Wire-Cloth 

Company 305 

Chapin v. Brown Brothers 305 

More V. Bennett 306 

State of New York v. The Milk Exchange 306 

Slaughter t». Thacker Coal and Coke Company 307 

Valid agreements 308 

Skrainka v. Scharringhausen / 308 

Dolph V. Troy Laundry Machinery Company 309 

Central Shade-Roller Company v. Cushman 310 

Trustee device cases 311 

MaDoiy v. Hanaur Oil- Works 311 

State V. Nebraska Distilling Company 312 

State of New Yoric v. North River Sugar Refining Company 313 

State r. Standard Oil Company 314 

Corporate combination cases 315 

Richardson v. Buhl 315 

Distilling and Cattle Fading Company v. People 316 

I C 

- V 



I Ihtioductory 318 

Sherman Act (1890) 3^9 

Wilson tariff Act (1894) 322 



Discussion and agitation (1895-1903) 323 

Act to expedite trust cases (1903) 326 

Act to create Bureau of Corporations (1903) 327 

Further discussion of legislative policies 328 

Act to expedite trust cases amended (1910) 330 

Act to provide for publicity in taking evidence {1910) 330 

Miscellaneous legislation 331 




Legislative history 333 

Introductory 333 

Message of the President 335 

Course of the Trade Commission bill through Congress 338 

Course of the Clayton bill through Congress 341 

The Trade Commission Act 342 

Organization of the commission 343 

Powers and duties 343 

Investigation 344 

Compilation of information 344 

Filing of annual and special reports by corporations 344 

Classification of corporations 346 

Investigation of alleged violations of anti-trust acts 346 

Recommendations for adjustment of business of corpora- 
tions alleged to be violating anti-trust acts 346 

Preparation of decrees in suits in equity 347 

Investigation of observance of decrees 348 

Investigation of trade conditions in foreign countries. . . . 349 

Publication of information collected by it 349 

Submittal of annual and special reports to Congress 349 

Recommendations for additional legislation 349 

Prevention of unfair methods of competition in commerce.. . . 350 

Miscellaneous provisions 355 

The Clayton Act 357 

Set of poative prohibitions 357 

Local price discrimination 358 

Tying contracts 360 

Holding companies 363 

Interlocking directorates 364 

Remedies 366 

Enforcement through a commission 366 

Individual suits for three-fold damages 367 



Suits brought by the government 369 

Individual suits for injunctive relief 370 

Labor provisions 371 



Conditions that gave rise to a demand for such legislation 374 

Competition of combinations of foreign producers 374 

Competition of foreign export associations 375 

Combinations of foreign buyers 377 

Miscellaneous obstacles to development of American export trade. 377 

Progress of the bill through Congress 378 

Provisions of the act 381 

Possible objections to the legislation 386 

Restriction of competition in the domestic market 386 

Promotion of international combinations 386 

Extension of foreign combinations 387 

International friction. 387 



U. S. V, E. C. Knight Company 388^ 

U. S. V, Trans-Missouri Freight Association 391 

U. S. V, Joint Traffic Association 394 

Addyston Pipe and Steel Company ». U. S 395 

Bement v. National Harrow Company 398 

Northern Securities Company r. U. S 399 

Swift and Company t». U. S 403 

Loewe v, La^or 405 

Standard Oil Company r. U. S 406 

U. S. V, American Tobacco Company 413 

Henry v. A. B. Dick Company 419 

U. S. V. Su Louis Terminal Association 422 

Standard Sanitary Manufacturing Company v. U. S 424 

U. S. V, Reading Company 426 

U. S. V. Patten 429 

U. S. V, Winslow 431 

U. S. V. United Shoe Machinery Company 432 

U. S. V, International Harvester Company 435 

U. S. V. Com Products Refining Company 436 

U. S. V, United States Steel Corporation 43^ 






Record of the administrations 441 

Benjamin Harrison 441 

Grover Cleveland 442 

William McKinley 443 

Theodore Roosevelt 443 

William Howard Taf t 444 

Woodrow Wilson 445 

Trust dissolutions 445 

The oil trust 445 

The plan of dissolution 445 

Ineffectiveness of 447 

Recommendations of Federal Trade Commission 451 

The tobacco trust 452 

Introductory 452 

Provisions of the decree 454 

Defects of the decree 461 

Investigation of Federal Trade Commission into efifectiveness 

of the dissolution 470 

The powder trust 474 

The shoe machinery trust 475 

The cash register trust 477 

The harvester trust 47q 

The glucose trust 484 

^ The meat combination 485 

. The steel trust 490 

Consent decrees 490 

. The aluminum trust . . . ., 490 

Miscellaneous concerns 492 

Suits pending 493 

Explanation of comparative failure of trust dissolution proceedings 494 

Accomplishments 497 




Introduction 499 

Economies in bargaining 500 

Purchase of materials and supplies 500 

Distributors 503 




Labor 504 

Fmandal institutions 505 

Railroads. 505 

Economies in production 506 

Continuous operation of plants 506 

Specialization of plants and machinery 509 

Specialization of ability 510 

Employment in each plant of the best devices, including patents 510 

Competition between plants 513 

Utilizatbn of by-products 514 

Insurance 515 

Smaller fixed charges per unit of product 515 

Economies in selling , 517 

Advertising 517 

Traveling salesmen 520 

Export trade 522 

Cross freights 528 

Bad debts 529 

Smaller stock of goods 530 

Disadvantages of the trust form of organization 530 

Scarcity of high grade administrative ability 530 

Difficulty of enlisting best services of operating officials 533 

Tendency of monopoly toward stagnation 534 

Additional financial outlays to which trusts are subjected 536 

Burden of highly centralized administrative machinery 537 

Record of trust faOures 538 

Kiplanation of trust successes 539 



Introductory 542 

Meaning of the term "fair price" 542 

Hof^ determine a fair price 543 

Determination of costs of production 544 

Uniform costs 544 

Varying costs 545 

Separate price for each producer 545 

Price adjusted to marginal cost 546 

Treatment of joint costs 547 

Necessity of frequent determination of costs 548 

Determination of a fair rate of profit 550 

Determination of the investment 551 



Regulation of profits rather than prices 552 

Additional consequences of price fixing policy 553 

Regulation of prices of raw materiab 553 

Regulation of wages 554 

Regulation of dealers' margins 555 

Government ownership 556 

Reduced efficiency 556 

Miscellaneous 557 

Extension of government authority 557 

Analogy of Interstate Commerce Commission 558 

Conclusion 559 



•# Conclusion 562 


Index. 587 


♦ • •• 



• -• 

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tF «> V k b 





The term " trust " in everyday speech is quite loosely used, and 
it consequently conveys a different idea to different people. It 
is thus essential at the outset to indicate clearly the sense in 
which the word is used in this book. 

The trust, as the term is here employed, means industria l 
monopoly. TTHoes not include monopolies (whether railroad 
or other j m the so-called public service industries. Nor does it 
include pook, trade associations, and other organizations which, 
though they may temporarily possess some power over prices, do 
not interfere with the substantial independence of the concerns 
involved. Yet neither is the term limited to the earlier and 
narrower concept of monopoly as an exclusive legislative or 
executive grant. A trust (industrial mono p oly) may be said to 
exist when a person, corporation, or combination owns or controls 
enough of the plants producing a certain article tobe able for all 
'practical purposes to fix Its price. Control over the price is the 
fundamental test of liionopoIyTTt is its essential and character- 
istic feature. Just what percentage of the business must be 
handled by a trust in order that it may be able to determine 
the price of a given article can not be stated with precision, yet 
it seems fairly certain that as a general rule the production of 
from 70 to 80 per cent of the national supply^ and possibly even 
l ess, is q uite ample for price control. As was said by Mr. H. O. 
Havemeyer, long the head of the sugar trust: "It goes without 
saying that a man who produces 80 per cent, of an article can 
control the price by not producing; the price must advance if he 


does not produce; and it must decline if he does produce, if he 
produces more than the market will take. "* The term trust or 
industrial monopoly, therefore, is not identical with complete 
monopoly;* for without an exclusive grant of privileges a com- 
plete monopoly is not likely to exist, unless it be based upon the 
sole possession of a limited natural resource. 

The concept of industrial monopoly here defined has been 
clearly described by the Supreme Court of the United States. In 
National Cotton Oil v. Texas, the Court said: '*The idea of 
monopoly is not now confined to a grant of privileges. It is 
understood to include a 'condition produced by the acts of mere 
individuals'. Its dominant thought now is, to quote another, 
*the notion of exclusiveness or unity'; in other words, the 
suppression of competition by the unification of interest or 
management, or it may be through agreement and concert of 
action.^ An d^ the purpo se is so definitely the control of p rices 
that monopoly ha s been^elined to be *unified_ ta ctics wi^ j-e- 
gard to prices.' It is the power to control prices which makes 
the inducement of combinations and their profit."* 

Just what is meant in this book by a trust may be made 
clearer perhaps by differentiating it from other forms of indus- 
trial organization. While there are many types of manufactur- 
ing organization, for the purpose of clarifying the idea of the 
trust we need distinguish but four: first, small-scale production; 
second, large-scale production; third, production by a group of 
plants united in a combination; and, fourth, production by a 

In the manufacture of many commodities, as is well known, 
small-scale operations still prevail. The following industries 

* Lexow Report (New York), 1897, p. iii. 

* In Patterson ». United States, 222 Fed. Rep. 619, the Circuit G)urt said: 
*'To monopolize trade or commerce, or a part thereof, is to exclude persons 
therefrom. It is not, however, to exclude all persons." Were all persons 
to be excluded, the result would be a perfect monopoly, which in experience 
has arisen only from a sovereign grant (p. 619). 

*The suppression of competition through agreement merely does not 
come within the author's definition of a trust. 

* 197 U. S. 129. 


will serve as examples: cigar, beet sugar, brick, gunpowder, 
bread, butter, cheese, ice cream, and fruit and vegetable can- 
ning. In the manufacture of a large number of other conmiod- 
ities, the size of the plant unit has greatly increased. As exam- 
ples may be cited the following: oil, iron and steel, hard coal, 
soft coal, cane sugar, cigarettes, shoes, textiles, automobiles, 
harvesters, cash registers, shoe machinery, and meat. Experi- 
ence has clearly proven that the articles mentioned, as well as 
many others, can be produced more economically in large fact- 
ories than in small ones. It should be borne in mind, however, 
that what is considered a large factory in one industry would be a 
small unit in another industry. A $6,000,000 cotton mill, for 
example, would be regarded as a large plant, whereas a $6,000,- 
000 steel mill would be a small-scale operation. 

The combination frequently represents a third stage. A num- 
ber of factories^ each of which may have already increased the 
size of its plant to the most economical imit from the standpoint 
of production, may combine in order to secure the economies of 
large-scale management, in addition to the economies of large- 
scale production. This combination may be of two sorts. It 
may be a combination horizontally (so to speak) or a combin- 
ation vertically. /^ horizontal combination is one that brings 
together under a single management several plants producing the 
same article, as, for example, a combination of fertilizer plants. 
i/A vertical combination is one that brings together a nimiber of 
plants, each of which concerns itself with a separate stage in the 
production of the finished product. This is what is known as 
the integration of industry. As an illustration, a combination of 
a coal mine, an iron ore mine, a blast furnace, a steel mill, and a 
steel rail mill, is a vertical combination. Such a combination has 
its advantages, as it assures the manufacturer of steel rails an 
ample supply of raw materials at a reasonable price. The com- 
bination horizontally also has its advantages, as, for example, a 
saving in freight rates. A company with one plant at New York 
and another at Chicago can supply the intervening market from 
that plant which is nearest the point of consumption. Because 
ci the obvious advantages of combination in certain lines of in- 


dustry (of which more later), this form of organization has fre- 
quently been employed. The American Agricultural Chemical 
Company is an illustration of a horizontal combination; the 
Bethlehem Steel Company an illustration of a vertical combina- 
tion. Some combinations, both horizontal and vertical, are 
formed without any thought of interfering substantially with the 
operation of competitive forces; others are resorted to expressly 
for that purpose. Yet even when the restriction of competition 
is the object of a combination, such is not always the result. The 
early iron and steel combinations, for example, merely intensified 
a competition that was already quite active. 

The fourth form of organization is the trust, by which is meant 
a combination of a suflScient number of plants to secure practical 
control over the supply, and thus over the price.* Well-known 
trusts are the Standard Oil Company,^ the American Tobacco 
Company,^ the United States Steel Corporation, the American 
Sugar Refining Company, the International Harvester Company, 
and the United Shoe Machinery Company. Though trusts may 
by definition originate through internal expansion, in fact they 
have come into being almost entirely through an act of combina- 
tion. They are thus horizontal combinations, yet of so far- 
reaching a character that they secure dominion over the industry. 
Trusts, morever, may be vertical combinations. Thus, the 
United States Steel Corporation is highly integrated, as are also 
the International Harvester Company, the Standard Oil Com- 
pany, and the American Tobacco Company. Not all combina- 
tions, whether horizontal or vertical, are trusts, however; it is 
possible to effect combinations, both horizontal and vertical, 
that have no semblance of monopoly power. 

* Mr. Kales, adopting the phraseology of the Department of Justice in the 
International Harvester Company case (Brief for the United States in 
United States v. International Harvester Company, no. 56, pp. 34-101), 
says that a combination to be a trust must embrace units which together 
occupy a " preponderant " posiUon in a given industry. Harvard Law 
Review, 30, p. 830. 

•The situation prior to the dissolution decrees of 191 1 is here in mind. 
Whether the oil and tobacco trusts were effectively dissolved or not is con- 
sidered in ch. 18. 


The question at issue, upon which it is hoped this book will 
throw light, is: what public ix)licy should be adopted toward 
trusts? Do trusts represent mainly an attempt to secure monop- 
oly profits by raising prices, and should they therefore be pro- 
hibited and the endeavor be made to restore competitive condi- 
tions so far as possible? Or do trusts represent a more efficient 
business oi;ganization, and should they therefore be permitted to 
exist subject to governmental regulation of their prices and the 
like? Or, finally, i sjt diffi cult, if not impossible, to resto re com- 
petitive conditions or t o regulate satisfac torily the prices of trust- 
contr6 nea"^rociuct s, and should therefore the monoix)lized in- 
dusfries be socialized? It is not assumed that this book solves 
these crucial problems, yet it is hoped that this presentation of 
the facts may contribute toward their solution. 


Wh^er or no 5uch was the main reason for their formation, 
the trusts have in fact restrained or eliminated competition in 
their field. Yet some time prior to the modem trust movement 
attempts had been made through other agencies to restrain the 
free play of competition. Some familiarity with these other 
attempts is essential to an understanding of the trust movement. 

The pool was the first and the commonest mode of restrictin g 
competition between manufactuyers._ A pool was formed in the 
bmss industry as girly as 1853; ^ and one in the cordage industry 
in 1861.^ Yet until after the Civil War combinations among 
manufacturers were few in number and narrow in scope. The 
inadequacy of transix)rtation facilities, and the comparatively 
small capital investment per firm, prevented manufacturers from 
reaching out to any considerable extent into the territory of their 
potential rivals; and there was thus less occasion for association. 
But with the rapid growth of business after the Civil War and 
the development of large-scale production, keen competition 
\J appeared. To check this competition pools were formed; and 
they have been numerous ever since. At the present time they 
are probably more numerous and varied than ever beforq. Even 
some of the leading trusts, such as the United States Steel Cor- 
poration, }mmt had pooling, agreements with the independent 
producers; and some pools ^pe international in scope. 

The term pool as here used is a catc h-all for the various Ugree- 
ments and associations whereby a number of conccmSj, ea<A 
preserving its own_organizatipn and to a large degree its own 
independence, adogted^^royisi^ns looking toward the main- 

* Lathrop, The Brass Industry, p. 121. 

• Dewing, Corporate Promotions and Reorganizations, p. 1 14. 



tenance or raising;; of the prices of the articles produced by them 
— the power actually to fix prices may or may not have been 
conferred on a governing body — nr^lnnki^g tow^^*^ ^^^ Hpprp<^ 
sion of the prices o fjhe mat erials an d supplies required by tj hem. 
rThe pool in the industrial world may be compared, so far as its 
organization is concerned, to a League of Nations in the political 
work!. The members of the pool, like the members of the League, 
^-^retain full control over certain matters, but temporarily delegate 
certain powers to a central organization. Upon the disbanding 
of the pool, as upon the dissolution of th^League, the members 
resume complete control over their affairs.\y^ 
(Pools are of numerous kinds, but six leading types ^ may be dis- 
tinguished: first, the gentlemen's agreement; second, the specula- 
tive pool; third, the regulation of the output pool; fourth, the 
.uiivision of tlTC^eld pool; fifth, the selling agency; and, swA, the 
patent pool, j ^ -^ <^ ^ 

First. The gentlemen's agreement is perhaps the loosest for m \ ^ 
<rf a pool.* As Its name implies it is simply an agreem ent between 
gentlemen l ooking tossaid the c ontrol of prices. As the agree- 
ment is between gentlemen, no formal organization is created, 
and j K> contracts o r papers are signed. Under the gentlemen's 
agreement there is no provision f or the payment of penalt ies in 
the. event of a violation of the agreement; such is not assumed 
to be necessary, since the members are expected to abide faith- 
fi).lly by their informal promises. Gentlemen's agreements have 

m very numerous in the iron and steel industry; in fact at 
[me time or other they have been found in every branch of the 

lustry.' They were employed also on several occasions in the 

^«. J No claim of comprehensiveness or all-inclusiveness is made for this class- 
" ^hJf^^^^' ^^ ^^°*^ ^^^ include, for example, those wholesalers* or retailers* 
^Dciations which Mr. Stevens calls legitimate trader associations. See 
^* !erican Economic Review, 3, p. 555. 

in iSome authors, for example, Mr. Haney (Business Organization and Com- 
ktion, 1915, p. 146), do not classify a gentlemen's agreement as a pool, 
s is because they give to the term pool a narrower and more restricted 
54'~Biing than is employed in this text. 

*flcport of the Commissioner of Corporations on the Steel Industry, 

P^ I, p. 75. 
J- • 



anthracite industry.^ However, mere agreements r arely proved 
succ^ ^ul, since there was nearly always at least one "black 
sheep" whose infract ions of the agreement Jed to its aband on- 

Second. Th e speculative pool, being organized for speculative 
purposes, is a ternporar y arrangeme nt, which is ordinarily tjgr- 
mjnated as soon as the objec t of the pool has been attained. Hm*- 
hafy^e^bo3t illustration ofjljis type^<j( pool is^th^Frwith 
Cej^r Syndicate,' orginia^a in pctd^, 1887 •-^l^ syndicate 
entered into contracts with thej-pfoducers of copper in other 
countries for llie purchase, at a mgure somewhat above the mar- 
kettt>rice, of all the copper proouced by them. Th^ syndicate 
hop^ to comer the world^s supply of copper, and it the time 
i the contracts wfcre entered into die control from 80 to 85 per cent 
W the total supbly. The financmg of these purchkses was, of 
course, a difficulAmatter, particulmy since the output of copper 
greatly increased imder the stimukis of abnormally nigh prices. 
uWortunately for the syndicate theke occurred a run an the bank 
which was providing the funds, and as a result the^yndicate 
speedily collapsed. Subsequently the price of copper fell much 
below what it had been prior to the formation of the podl.^ Be- 
cause of the fact that speculative pools were tonporaryjn nataifi 
and difficult to finance^ they ^t/^e not satisfactory to the manu- 
facturers s eeking somC -jievice whereby they mighfj^ffectively 
throttle competition. \ 

Third . j\^ commo n type of pool is one which endeavors l o 
regulate the output, and thus indirectly to regulate prices. Su( 
a pool rnay laku various forms, li'ower may be given to a centnll 
committee to order a curtailment of the output of the individioll 
mills, as in the cotton bagging pool of 1888.* More commonly] 
however, the members of the pool through a process of discussiin) ^ 
agree upon the total output and upon the division of this outp^ \ 
among themselves in certain definite proportions. This was tl^ 
form of agreement for many years in the anthracite coal industiy 

* See Jones, The Anthracite Coal Combination in the United States, f^, 

* Andrews, Quarterly Journal of Economics, 3, pp. 508-516. 
' House Report no. 4165, 50th Cong., 2nd Scss., p. 144. 



although the agreement here was between the railroad companies, 
rather than between the coal mining companies/ Pi diili milinii^' ^ 
(all of them were engaged in the mining of coal either directly or 
indirectly) was allotted a certain percentage of the total ship- 
ments of anthracite coal, and was expected to take care that the 
amount of coal shipped by it, including that carried for indepen- 
dent coal mining concerns, did not exceed this percentage. 
Sometimes penalties were imposed for the violation of these 
agreements; at other times not. W^en provision was made for 
p>enalties, the railroads exceeding their allotment contributed 
to a fund, which was distributed among the railroads that 
had carried less than their allotment.* ^ a..; #*««/ 

One of the most important pools regulating output was xne ' 
steel rail pool, formed in August, i88y.^ The members of this 
pool produced more than 90 per cent of the country's out- 
put of steel rails. By the agreement adopted the total out- 
put as then agreed upon was divided among the companies 
in definite proportions, and provision was made for a Board of 
Control, which, with the written consent of 75 per cent of the 
tonnage, might increase the pool's output from time to time. 
The fixing of prices was not provided for in the memorandum of 
agreement, though an informal understanding was reached. This 
pool was comparatively successful. The large capital necessary 
for the manufactiu*e of steel rails discouraged new competition, 
and the practice on the part of railway officials of buying the 
neccgsary rails once a^year acted as a stabilizing factor. Never- 
theless, the pool collapsed in 1893, because of a disagreement 
over the division of tonnage, the situation being aggravated by 
the prevailing industrial depression, which rendered imperative 
a reduction in the total output. In 1894 the pool was reorganized, 
though not without considerable difliculty. The depressed state 
of the trade led to new violations of the agreement in 1896, and 
in February of the following year the pool was again broken up. 

* Jones, The Anthracite Coal Combination in the United States, pp. 41-50, 

* Report of the Commissioner of Corporations on the Steel Industry, 
port I, pp. 68-72. 


This second dissolution of the pool was followed by a drastic 
reduction in prices. Whereas the pool price for steel rails had 
' been $28 per ton, upon the termination of the pooling agreement 
the price fell to $16.50.^ 

Another imix)rtant pool in the steel industry was the so-called 
wire nail pool, organized in 1895.^ The Association of Wire and 
"■^ut Nail Manufacturers provided for a division of the output 
among the members of the association, and also fixed the amount 
of nails to be offered for sale each month, and the price at which 
they should be sold. Immediately upon its organization the pool 
advanced the price of nails. Whereas the " base " price had been 
$1.20 per keg in June, 1895, by May, 1896, it had risen to $2.55. 
In view of the fact that no large amount of capital was required 
to engage in the nail business, it was to be anticipated that the 
life of the pool would be short. Whether or no its existence was 
prolonged by its audacious price policy, it came to an end in De- 
ember, 1896, about a year and a half after its organization. 

A pool in the meat-packing industry was organized as early as 
1885 ; and since that date pools of one kind or another have been 
maintained almost steadily.* The pool of 1885 determined the 
quantity of meat that each member might ship, and by this 
means succeeded in exercising considerable control over the 
price of meat. In 1893 a more complete and effective agreement 
was entered into. As the result of this agreement the represen- 
tatives of Swift and Company, Armour and Company, and Mor- 
ris and Company held weekly meetings, which were occasion- 
ally participated in by representatives of the Cudahy Packing 
Company, and Hanmiond and Company. At these meetings 
each of the companies reported on its shipments into designated 
territories during the previous week and on the prices received. 
These reports served as the basis for the payment of fines for 

1 Brief for the United States in United States v. United States Steel Cor- 
poration (no. 481), vol. I, pp. 167-168. 

'Report of the Commissioner of Corporations on the Steel Industry, 
part I, pp. 72-73; and Edgerton, Political Science Quarteriy, 12, pp. 246-272. 

* Report of the Federal Trade Commission on the Meat-Packing Industry, 
part II, ch. I. 


overshipments (40c. per 100 lbs.), and for the allotment for the 
ensuing week. In order that full secrecy as to these arrange- 
ments might be maintained and the consequences of legal pro- 
ceedings avoided, the parties to this agreement were designated 
by certain letters of the alphabet rather than by their real names. 
This poolingj^^gement continued from 1893 to 1896. During 
1897 the pajftKiS not effective because of die competition of 
Schwarzschild and Sulzberger, an important company not a 
member of the pool. The following year a new pool was entered 
into, including this time the firm of Schwarzschild and Sulz- 
berger. This arrangment lasted until April, 1902, when be- 
cause of the public agitation against the packers a decision 
was made to dissolve the pool. Thereuix)n the secretary 
lyndestroyed all the records of the meetings of the pool. 
^^F^yTrhe chief difficulty in this third type of pool lay in securing 
Lir agreement upon the percentage.allQtment, both at the organ- 
ization of the pool and upon its renewal from time to time. An 
agreement might be reached at the time the pool was organized 
for an allotment based on capacity, previous sales, or what not. 
Yet this did not remove the difficulty; for each company was 
strongly tempted to enlarge its plant, in order that upon the ex- 
piration of the pool it might demand an increased percentage as 
a condition of entry into a new pool. If this demand was not 
acceded to, as it commonly was not, it became impossible to ef- 
fect a renewal of the agreement; and with the increased facilities 
for production the market was flooded, and prices fell, perhaps 
even lower than prior to the formation of the poolj This was 
well illustrated in the experience of the steel industry. Upon the 
disruption of the steel rail pool in February, 1897, the price of 
steel rails fell to $16.50, which was about $4 per ton below the 
average price of rails during the six months preceding the 
organization of the pool. 

In these pools regulating or apportioning the output there may 
or may not have been an agreement as to price. In the anthra- 
cite railroad pool of 1873, for example, a schedule of prices was 
agreed upon, and authority was given to a Board of Control to 
determine the prices to be charged from time to time; whUe in 



the pool of 1885 in this same industry nothing was said in regard 
to prices. The steel rail pool of 1887 was silent on the subject of 
prices; but the ix)wder pool of 1889, known as the Fundamental 
Agreement, gave a central bcxard full power to fix prices. Yet 
whether or no any price-making machinery was set up, it was reg- 
ulation of prices that was in the minds of those^^t were instru- 
mental in organizing output pools. Obviousl}^!^ could not 
be maintained, much less advanced, unless the separate concerns 
were prevented from increasing their output at will; and the 
regulation of the output was thus the means whereby the 

A desired control over prices was to be exercised. 
j<^ J^ourth . A good illustration of a pool providing for a division 
jf tfig i]^]^ is the agreement between the Addyston I'lpe and 
Steel Company and five other corporations, all engaged in the 
business of manufacturing cast iron pii>e, and selling in particular 
to municipal corporations, gas companies, water companies, 
and large institutions accustomed to invite bids from various 
concerns.^ Under this agreement, entered into in 1894 and 
modified in 1895, tjie companies divided the United States into 
three parts: reserve cities, free territory, and pay territory. 
The reserved cities were reserved for certain companies, and 
none of the other companies was to do any business there. Free 
territory was territory in which any one of the comp>anies could 
make sales without restriction. But the bulk of the United 
States (thirty-six states in all) was designated as pay territory; 
and in this territory (in which the companies had a practical 
monopoly because of the limitations on competition imposed by 
high freight rates) the conditions of carrying on business were 
definitely laid down. The six companies were to refer all in- 
quiries for pipe in this section to a representative board, and 
this board was to fix the price at which all pipe in pay territory 
should be sold. The companies were then to bid on the order, 
and the one that offered to pay the highest bonus obtained the 
contract, which was to be executed at the price already set by 
the board. In order that the existence of the pool might not^be 

'17s U. S. 211-248; and Argument of Hon. E. B. Whitney, Ripley's 
Trusts, Pools and Corporations (1916), pp. 78-96. 


suspecte d, the other companies were to make fictitious bids , bids 
sufficiently high to insure that the contract would not be awarded 
to them. At the end of each year, after deducting the expenses 
of the association, the bonuses were to be divided among the 
members of the pool on the basis of their annual shipments into 
pay territorv^Bjhe profits of each company, therefore, consisted 
of the exces^Kne price over the cost on the jobs awarded to it, 
plus the bonuses received by it^a work taken by the other com- 
panies. These profits were fl^Br, of course, than they would 
have been without the agrecS^^t, since the price to be charged 
for pipe was fixed by the representative board, and therefore 
was not subject to competition between the companies. In 1899 
this pool was declared iU^al by the Supreme Court of the 
United States.^ 

A division of territory was also established by the wire nail 
pool; and more recently by the meat packers as regards their pur- 
chases of cream and butter. 

In the tobacco industry an international pool providing for a 
division of the field was effected. In September, 1902, the Amer- 
ican Tobacco Company (the American trust) and the Imperial 
Tobacco Company (a British combination) entered into an 
agreement whereby the trade of the United States, Cuba, Porto 
Rico, Hawaii, and the Philippines, was reserved to the American 
Tobacco Company, and the trade of Great Britain to the 
Imperial Tobacco Company.^ A new concern, the British- 
American Tobacco Company, owned by the two companies 
above, was organized to handle the export business in the rest 
of the world. The earth, like Caesar's Gaul, was divided into 
three parts. 

International pools have also been established in the steel 
rail, thread, gla^ bottle, aluminum, gunpowder, calcium car- 
bide, and 9^t industries. 

,i^Mi^ Traols sometimes are merely selling agencies. The 
manufacturers turn over their total output to a centrai' selling 

« See p. 395. 

' Report of the Commissioner of Corporations on the Tobacco Industry, 
part I, pp. 166-176. / 

i >■ 


bureau, which makes all the sal^^/^^ guuimuAliation is the 
Michigan Salt Association, an organization of salt producers 
effected in 1876.^ This association handled 85 per cent of the 
salt output of the important Michigan field. The producers 
made a contract with the association every year, and under the 
terms of the contract they agreed to deliver to ^Association all 
the salt produced by them during the course o^Wyear. Each 
member reserved the right to D|^uce as much salt as he pleased, 
yet since the association had^^nlete charge of sales, it could 
adjust the price in such mann^^ to prevent overproduction. 
This association expired by limitation in 1881, but was immedi- 
ately reorganized under another name. In 1886 it was again 
reorganized, this time under its original name. The salt associa- 
tion on the whole was quite successful. This success may be 
attributed to the fact that, like all selUng agencies, it did away 
with price cutting by the members as a means of securing in- 
creased business. 

A more recent illustration is. the Continental Wall Paper 
Company (1898), a New York corporation, the stock of which 
was subscribed to by a group of concerns manufacturing 98 per 
cent of the coimtry's output of wall paper.^ As the selling agent 
for the companies in the pool, the Continental Wall Paper Com- 
pany purchased the total output of these companies at prices 
fixed in the agreement, and distributed the profits among them 
in proportion to the capacity of their works. But the Continen- 
tal Company was more than a mere selling agency. Its directors 
were constituted a committee with control over the production of 
the individual factories, and the prices at which wall paper 
should be sold to the trade. The company, it was agreed, was 
to compel jobbers to sign an agreement to buy only from mem- 
bers of the pool and to maintain prices. To add to the protective 
force of the tariff duties, an arrangement was made with the 
Canadian wall paper manufacturers, whereby each group 
agreed not to compete with, the other. Finally, the only two 
manufacturers in this country of wall paper machinery were 

* Jenks, Political Science Quarterly, 3, pp. 83-86. 
^212 U. S. 227-274. 

>iiuL& rc2>urtcu lu lur suppressing irccuuiu ui, 

:uring undueAdces, shown by the reported 
)mplete in ^Bitails/^ NCVenheleSTwithin 
le ContinentaTCompanv found its power gone. 


induced to confine their sales of machinery to members of the 

(Of this arrangement the Circuit Court said: "A more complete 
monopoly in an article of universal use has probably never been 
brought about. It may be that the wit of man may yet devise a 
more complete scheme to accomplish the stifling of competition; 
but none of the shifts resorted to for suppressing freedom of 
commerce and securing undu< 
cases, is half so coi 

a very few years the ContinentaTCompany found its power gone. 
The increased prices initiated by the company led to the forma- 
tion of new concerns, particularly since a market was inmiedi- 
ately available through the Continental Company; and it 
proved impossible to control the jobbers.' The liquidation of 
the company was therefore determined uix)n, and this step 
occasioned no difliculty, since the company did not own any 
operpirig properties. f>^ ., 

^igtfi. A^iSh'type of pool is the patent pool. / G^ rsi^tht^ ^^ 
General Electric Company and the Westinghouse Company — 
controlling between them some 90 per cent of the manufacture 
of electrical supplies — entered into a pooling agreement for the 
joint use of substantially all their patents.^ This agreement 
put an end to costly litigation, and also, it was reported, to 
competition for the acquisition of additional patents from 

fSame pools are founded on the ownership of patents essential 
ta the manufacture of a particular article. Thus, certain manu- 
facturers of enameled iron ware, owning valuable patents, joined 
forces and agreed to permit the use of these patents by manufac- 
turers generally u|X)n the payment of royalty and upon the exe- 
cution of a license.^ The license agreement established a sched- 
ule of prices, which the licensee (the manufacturer) agreed to 

' 148 Fed. Rep. 947. 

* Industrial Commission, XIII, p. 284. 

* See Chron., 62, pp. 476, 502 (1896). 
' 226 U. S. 20-52. 


observe; and provision was made for changes in prices from time 
to time by the licensor with the approval of a conmiittee repre- 
senting the manufacturers. Moreover, the jobbers were brought 
into the deal by the refusal of the manufacturers to sell to those 
jobbers who did not sign an agreement to handle only the goods 
of the licensed manufacturers and to maintain the resale prices - 
as fixed from time to time. The government claimed that this 
was a price-fixing device in th^^ise of a licensing arrangement 
for the common use of patent^p^d was sustained in this con- ^ 
teution by the Supreme Court. 

taleeff; wMBHjrMrtTpoint out the Q^lsoj^g^gg^nd the <iiaa4' 
vantag es of pools as a device for restraining competition. With 
respect to the advantages, the pool provided a means whereby 
manufactu rers could cooper ate in regard to prices and trade con- 
ditions withou l^ entirely sacri ficing their independence. The 
American business man was an individualist, and thus looked 
kindly on a business arrangement that increased his profits and 
yet left him largely the manager of his own affairs. The pooling 
system had the further advantage of not removing the financi al 
indu cement to ec onomical administration of the indivlcTual p rop- 
perties. Since each manufacturer continued to oj)erate his own 
factory, it was possible for him to increase his profits, not only 
through better prices, but als6 through such economies in pro- 
duction and selling ^ as» he might individually put into effect. 
(Howevet^ the financial inducement — though it was not removed 
— ^must havit been impaired, as compared with true competitive 
conditions, inView of the fact that a manufacturer who desired to 
increase the si^ of his plant in order to realize the economies oF 
larger-scale production would certainly experience great difficulty 
in Securing assent tg ain increase in his percentage allotmen%.)L 
A third advantage was that the pool did not cause overcapitali- 
zation nor increased expenses in the way of taxes and fees. 
Finally, it provided a flexible form of organization, which could 

* Except when, as in the central selling bureau, he no longer conducted 
the sales. 


take on different f<Hins by way of adjustment to the varying ' 
conditions in each industry. 

Experience ^as shown that pooling agreements have more 
generally been attended with success when there were present 
the following favoring factors: (i) the requirement of large c^>- 
ital expenditure as a condition of economical production-rthis 
prevented competiti^Brom arisbiy^o readily; (z) as a corol- 
lary <rf the above, ^PlmaJ^nmnlifer'of concerns involved — 
this' Militated the establistmnt and maintenance of ti compact 
organization; (3) a willingness to adopt a farsighted policy with 
respect to output and prices — high prices might temporarily in- 
crease profits, but they stimulated competition, and thus even- 
■ tuallyled to increased output and lower prices;and (4) a certain 
degree of uniformity among the members of the pool with re- 
spect to the size and natureof their business — this tended to give 
each member a common interest in the success of the pool. 
On the other hand pools have proven to be weak in at least 
two important particulars, (i) They have not been able to 
maintain a sufiScient degree of stability witl^espect either to 
prices or to industrial policy. The individi^members of the 
nomy, and their con- 
solution of the agree- 
r a desire oii the part 
t even if the pool did 
itition, it proved very 
■eriod of declining de- ' 
operative in order to 
ts, because of the dis- 
output. IIw w c each 
le amount allotted to 
tduced prices, Thjis, _ 
that as a contrivance 
emponuily successful, 
jng been at variance 
le common law pools 
rely nonenforceable in 
Sherman Act of 1S90 



they became positively illegal/ resort was had in some indus- 
tries to a new device for restraining competition — the trustee 


device. ^ A'd&qjplim of this new 
j«cttrfthe ifext chafttgi^--- — ^^ 

^ Railway pools were made illegal by the Act to Regulate Commerce of 

* N 



^ V. 

, \ 



> , 

V^ I 


>\ L 





The first resort to the trustee device or the " trust, " as it will 
be called to distinguish it from the modem trust, was by the 
Standard Oil Company, Prior to 1879 Mr, John D. Rockefeller 
and his associates had acquired a large number of oil concerns 
in the interest of the Standard Oil Company, but the shares 
of these concerns (instead of being held directly by the Stand- 
ard Oil Company) had been registered in many cases in the 
names of various individuals who held them for the benefit of' 
the company. In order to centralize more fully the control of 
these properties, it was decided in 1879 to organize the Standard 
Oil "trust," 

The " trust" agreement as revised in January, 1882, included 
about f orty companies , controlling from r^ fn gi; ptr rent nf the 
refining capacity of the country.* It provided for gir^e trpatees , 
rs. John I). Rockefeller, William Rocke- 
I John Archbold. The trustees receive d 
to the agreem'ent an a ssignmg nt oLtheir 
, and i n retu rn therefor gave " tfust cer- 
the valuation of the properties. The 
the owners of the stocks deposited with 
hem in trust for the owners of the trust 
; noted, however, that these stocks were 
he joint account rather than for the in- 
:ertificate holders; a stockholder in any 
e trust agreement his title to the stock 
ny, and secured instead a proportionate 

[cs in Standard Oil Company v. United States 
ropy ()f the aRrccment is in the Report of the 
iR on the Petroleum Industry, part I, pp. 361- 



interest in all the stocks and property held by the trustees.' 
The trustees together owned 466,280 of the trust certificates 
out of a total of 700,000; and four of them held a majority of 
the trust certificates. They were thus able to elect the officers 
and directors of each of the constituent companies, and to man- 
age the properties in complete harmony. 

The trustees under this agreement were given powers sub- 
stantially similar to those possessed by the directors of an ordi- 
nary holding company. They were to collect the interest and 
dividends on the securities held in trust, and to redistribute 
such portion thereof as they saw fit among the holders of the 
trust certificates. They were authorized to use any surplus 
trust funds to purchase the bonds and stocks of other companies 
engaged in the oil business, and to hold these securities for the 
benefit of the trust certificates. The centralized control 
provided for in the agreement made it possible for the trustees 
to dismantle those refineries that were poorly located, and to 
build new works at strategic points. Obviously it made no dif- 
ference to the former owners of a given plant whether or not that 
plant was operated, since they received a certain percentage of 
the profits earned by all the companies. The trust agreement, 
further, made provision for the admission of new companies and 
individuals; for the formation, whenever advisable, of a Stand- 
ard Oil Company in any state in the country. The jurati on of 
the op^^^^^^l ^e ir. K^ f^|. «^ p ^yiod of tw ffl^yO"*' y^V^ flf^^^ 
the dea th of the last surviv ingt ruste e. but provision was made 
for the termmation of the agreement within one year of its exe- 
cution upon the approval of nine-tenths of the certificates (in 
value), and within ten years upon the approval of two-thirds of 
the certificates. 

The success of the Standard Oil "trust" invited imitation. 
In 1884 there was formed the American Cotton Oil " trust "; and 
in 1885 the National Linseed Oil '* trust. "^ The cotton oil 

*This consideration proved to be highly important when the "trust" 
was dissolved in 1892. See p. 25. 

' Conant, Publications of the American Statistical Association, 7, p. 208 
(March, 1901). 


"trust" included some seventy mills, located for the most part 
in the South, engaged in manufacturing and refining cotton seed 
oil.^ Its form of organization was precisely like that of the 
Standard. However, it soon met with difficulties on all sides, and 
in 1889 was reorganized as the American Cotton Oil Company. 
In 1887 a " trust " was organized in the whisky business. From 
1882 to 1887 some eighty distillers had maintained a precarious 
existence through pools. These pools, however, had proven 
unsatisfactory; it had not been possible to maintain them. Ac- 
cordingly the leading distillers decided to establish a more com- 
pact organization modelled on the Standard Oil trust agreement 
of 1882. This was accomplished in May, 1887.^ The Distillers 
and Cattle Feeders' Trust, as the new organization was called, 


comprised about eighty companies, located mainly in New York, 
Ohio, Indiana, Illinois, Wisconsin, Missouri, and Nebraska, 
manufacturing from 85 to 90 per cent of the total output of al- 
cohol and spirits. There were nine trustees, who issued trust 
certificates in exchange for the shares of the corporations enter- 
ing the "trust." Inasmuch as the trustees held a majority of 
the stock of every corporation, they were able to elect the 
directors and officers, and thus to control the management. 
This in turn enabled them to control the market, for instead of 
exporting the surplus at a loss, as had been done by the earlier 
pook, it was now possible to limit the output to the demand. 
It also lay within the power of the trustees to close up the poor- 
est distilleries; and they did close some sixty-eight of them, 
the output being concentrated in the best equipped plants, 
with a consequent saving in the cost of production. 

Another group resorting to the trustee device was the sugar 
refiners. During the seventies and eighties competition in the 
sugar refining industry had been quite keen; between 1867 and 
1887 some thirty-six refineries had been closed.' By 1887 there 

* Andrews, Quarterly Journal of Economics, 3, p. 1 29. 

' A copy of the agreement is in House Report no. 4165, 50th Cong., 2nd 
Seas., pp. 57 seq. Sec ibid., pp. 64, 72, 91; and Jenks, Political Science 
Quarterly, 4, pp. 305-308. 

• Cf. Jones, Quarterly Journal of Economics, 34, p. 505. 



were left only twenty-six refineries, operated by twenty-three 
companies. The concerns that survived this period of severe 
competition were those that resorted to large-scale production, 
with its resulting economies. In August, 1887, seventeen of 
these companies, owning twenty refineries, and possessing 
among them approximately 78 per cent of the refining capacity, 
entered into a trust agreement to become effective October i, 

In its main provisions this agreement was substantially like 
the trust agreements already described. Eleven trustees con- 
stituted a Board, known as the Sugar Refineries Company, and 
distributed trust certificates ($50,000,000) to the shareholders 
of the corporations in return for the securities held by them. 
The trustees thereupon caused themselves or their representa- 
tives to be elected directors of the separate corporations, and 
were thus able to manage the affairs of all in unison. It was 
provided that 15 per cent of the certificates allotted to the sev- 
eral companies should be left with the Board, and that these 
and any part of the $50,000,000 of certificates not allotted might 
be employed by the Board for the acquisition of other refineries 
or for certain other purposes. A unique feature of the sugar 
trust deed was a provision that no trustee should be interested 
directly or indirectly in the purchase or sale of sugar, whether 
for the purpose of speculation or otherwise, without the consent 
of a majority of the Board. Of the twenty refineries acquired 
by the Sugar Refineries Company twelve were soon dismantled, 
and the other eight were consolidated into four. 

In this same year (1887) there was organized the National 
Lead Trust ^ and the Cordage '* trust. " ^ The latter, known as 
the National Cordage Association, controlled at this time only 
30 per cent of the country's output of rope and cordage; it was 

^ Original Petition in United States v. American Sugar Refining Company, 
pp. 38-40, 166. For a copy of the trust agreement, see ibid., exh. A. 

' Conant, Publications of the American Statistical Association, 7, p. 209 
(March, 1901). 

•Dewing, Corporate Promotions and Reorganizations, pp. 116-117, 



not until 1891 that it attained a monopolistic position in the 

The organization of these "trusts" was followed by a general a 
outcry against monopolies. How fully the attention of the pub- ' 
lie had been called to the establishment of the "trusts," and 
what its reaction was, is shown by the numerous laws forbidding 
combinations and trusts enacted by the state legislatures from 

1889 to 1893,^ and by the passage by the National Congress in 

1890 of the Sherman Anti-trust Act, which prohibited every 
contract, combination in the form of trust or otherwise, or con- 
spiracy, in restraint of trade or commerce among the several 
states, or #ith foreign nations, and every monopoly or attempt 
to monopolize. And as it soon proved, the "trusts" were par- 
ticularly vulnerable, much more so than the pools. The pools, 
it is true, were unlawful, but they were secret agreements, and 
therefore were to some extent free from attack. The Addyston 
Pipe and Steel Company is the most conspicuous instance of a 
pool dissolved by legal process, and the evidence here was ob- 
tained only because a disgruntled stenographer painstakingly 
accumulated it. The trust agreements of the eighties, however, 
were tangible matters of record. There was a formal transfer 
by the stockholders of their legal title to the stock of the con- 
stituent companies, as a consideration for which they received 
trust certificates. The rights of the members were clearly de- 
fined in the trust agreement. The fact could not be concealed 
that these companies, whose corporate existence had been pre- 
served, had almost completely sacrificed their independence. 

Hardly had the "trusts" been created when legal proceedings 

were instituted against them. The state of Louisiana attacked 

the cotton oil "trust"; the state of Nebraska, the whisky 

"trust"; * the state of New York, the sugar "trust"; and the 

* At kast six states — Kansas, Maine, Michigan, North Carolina, Tennes- 
see, and Texas — passed such laws in i88g. 

*Sec p. 312 for the decision of the Supreme Court of Nebraska; and 
p. 316 for the decision of the Supreme Court of Illinois declaring illegal 
both the whisky "trust" of 1887 and the corporation that succeeded in 1890 
to its business. 



State of Ohio, the oil "trust." The action against the sugar 
"trust" came in 1888. In that year the Attorney General of 
New York State brought suit under the common law against 
the North River Sugar Refining Company, a New York corpor- 
ation, pra3dng that the charter of the company be vacated and 
the company dissolved. In a decision rendered in June, 1890, 
the Circuit Court of Appeals decided against the company.^ 
The court held that the N orth R jyc^Sugar Refining^ompany, 
in entering the "trust," had given over the control of its 
affairs to an irresponsible board, and that such delegation of 
its essential corporate powers was a perversion of the privi- 
leges conferred by the company's charter. Furthermore, the 
court held that the company had helped to create a trust 
which, in substance and effect, was a partnership of separate 
corporations, and for corporations to enter a partnership was 
illegal. The company's charter, therefore, was taken away, and 
its corporate existence terminated. 

The Standard Oil " trust" agreement was likewise condemned 
by the courts. In May, 1890, the Attorney General of Ohio 
filed a petition against the Standard Oil Company of Ohio, 
charging that the company had violated the laws of the state by 
placing the control of its affairs in the hands of trustees, nearly 
all of whom were nonresidents of the state. Great pressure 
was brought to bear on the Attorney General to induce him to 
discontinue the suit, but without success. The decision of the 
Supreme Court was rendered in March, 1892.^ As in New Yoric 
State, the "trust" arrangement was declared illegal, though the 
Ohio court put more emphasis on the creation of a monopoly. 
The court said: " the observance [of this agreement] must subject 
the defendant [the Standard Oil Company of Ohio] to a control 
inconsistent with its character as a corporation. . . . The law 
requires that a corporation should be controlled and managed by 
its directors in the interests of its own stockholders, and confor- 

* 121 N. Y. Reports 582-626. The decision is described in more detail 
on p. 313. 

'49 Ohio State Reports 137-189. For a fuller discussion of this decision, 
see p. 314. 


mable to the purpose for which it was created by the laws ef its 
state. By this agreement, indirectly, it is true, but none the less 
effectually, the defendant is controlled and managed by the 
Standard CHI Trust, an association with its principal place of 
business in New York City, and organized for a purj)ose contrary 
to the policy of our laws. Its object was to establish a virtual 
monopoly of the business of producing petroleum, and of man- 
ufacturing, refining and dealing in it and all its products, 
throughout the entire country, and by which it might not merely 
control the production, but the price at its pleasure. All such 
associations are contrary to the policy of our state and void." 
The court did not order the dissolution of the Standard Oil 
Company, as urged in the petition, but simply commanded it to 
cease its connection with the " trust." 

Any expectation that the decision of the Supreme Court of 
Ohio would put an end to the oil monopoly proved to be 
unfounded when the nature of the dissolution became i^parent. 
On March 21, 1892, at a meeti ng of the trust c ertificate 
hold^s,^ a r^olutjon^ te rminating t he "trus t" was a dopted.* 

At tfiU timP thp stnrlrg nf piprhfv-fniir rompanii^ were held by 

the Standard Oil trustees . On April i the stocks of sixty-four of 
these corporations were transferred to some one of the remain- 
ing twenty. This left the stocks of twenty companies in the 
hands of the trustees, and these they proceeded to distribute 
among the holders of the trust certificates. There were out- 
standing at this time $97,250,000 trust certificates. The trus- 
tees, who became liquidating trustees, divided the stock of 
each of the twenty companies into 972 ,500 ^ rts. They then 
cAered to give to each trust certificate hdlcler in exchange for 
each share 1/972,500 part of the stock of each one of the twenty 
corporations. The only ones who accepted this offer were the 
trustees (themselves the largest certificate holders) and the 
members of their families and their immediate associates. The 
smaller trust certificate holders were discouraged from liquidat- 
ing by the fact that they would have received only fractional 

* On the dissolution scheme see Brief for the United States in Standard Oil 
Company ». United States (no. 725), vol. I, pp. 56-58, 60-61, 70, 72. 



shares in the twenty companies, and these companies declined to 
pay dividends on fractional shares. Dividends continued to be 
paid, however, on the trust certificates when not liquidated. The 
nine trustees, therefore, became the holders of the majority of 
the stocks of the twenty companies, and as liquidating trustees 
they also held the stocks not exchanged for trust certificates. 
This dissolution obviously was nominal; it effected no real 
change in the situation. In fact, Mr. Archbold admitted before 
the Industrial Commission that the companies worked together 
after the dissolution as harmoniously as before.^ 

It was apparent that the Standard interests had not attempted 
to obey the court's order, but had stooped to a mere subter- 
fuge. A new suit, therefore, was instituted in 1897 against the 
Standard Oil Company for failure to obey the court's decree of 
March, 1892. This suit dragged along until December, 1900, 
when it was dismissed. Meanwhile the Standard Oil Company 
had reorganized as a holding company.^ 

1 1, p. 574. * See p. 56. 



The decisions of the New York and Ohio courts m 1890 and 
189a, respectively, showed that even without the prohibitions 
of the Sherman Anti-trust Act the "trust," sofar as thelaw was' 
concerned, was not a permissible form of business organization. 
The Standard Oil interests, it is true, avoided collision with the 
law for a time by the development of a,eMnnuivty of interest, 
but this loose fonn of organization proved satisfactory mainly J 
because there already existed among the members an unusual ( 
d^ree of mutual confidence and good will. It appeared, there- ' 
fore, that unless some new expedient for resttaining competition 
could be hit upon, the manufacturers msistent upon^JiQlding 
ctmipetition in check must needs resort once more~foTJooi- 
ing agreements. Yet this was even less desirable than before 
from the manufacturers' standpoint, since the Sherman Anti- 
trust law had been passed in 1890. This act made poob, when 
effecting a restraint of trade, not only unenforceable, as under 
the common law, but actually ill^jal; and theii existence would 
therefore have to be kept secret. By what means then were the 
manufacturers to secure relief? 

The new expedient to restrain competition was the modem 

trust. The trust was effected in one of two ways: either by 

means of Tsecu rity holding corporation, that is, a company own- 

)ther companies; or by means 

, that is, a company owiung 

perty of the companies to be 

is a type of business organ- 
up of corporations by owning 
le holding company, whether 
le already in existence, must 


' possess legislative authority to hold the stocks of other corpora- 

. tions. Armed with such authority it proceeds to purchase, 
either with cash or with its own securities, a majority at least 
of the shares of the companies which it plans to combine. The 
controlled companies maintain their separate existence, they 
have their separate officers and managers, and they are nom- 
inally independent; yet inasmuch as the holding company elects 
their directors, it can eflFectively control their management 
and operate their properties in accordance with a unified 

V The holding corporation was thus after all but a modification 
of the illegal "trust" which it was designed to supersede. As 

, Professor Meade has pointed out,' the only important changes 
effected were: the substitution of the shares of the holding com- 
pany for the certificates of the old "trust"; the substitution of 
the relation of owner for the relation of trustee; and the sub- 
stitution of a board of directors for a board of trustees. It would 
appear therefore that from the point of view of legal principle 
the new arrangement was quite as unlawful as the old. 

What then, it may be asked, was to be gained by adopting 
the new form of organization? The possible gain was two-fold. 
From a legal point of view the holding company might prove 

' less vulnerable. The old "trust" was an agreement between a 
body of trustees and a group of corporations, which, through the 
action of a majority of their stockholders, surrendered their in- 
dependence, and in so doing exceeded their corporate powers. 
The holding company, however, was authorized by law to hold 
the securities of other companies. As a device for restraining 
competition it had not yet been declared illegal, and tjiere was 
at least the possibility that it might successfully withstand an 
attack upon its validity. Yet even if ultimately its fate did 
prove to be that of the " trust," a second gain was possible. . The 
organization of the holding company insured a temporary res- 
pite from competition, and presumably the profits thus realized 
would be retained by the corporation or its stockholders, and 
would not need to be returned to the consumers from whom 

* Trust Finance, p. 36. 


tbey had come. Barring heavy penalties for the employment of 
an ill^al device, there was much to gain in the o^anization of 
a holding company trust and little to lose. 

If the holding company as a means of eliminating competition 
presented such attractive possibilities, why was it not adopted 
earlier? The reason is that no express legislative sanction ex- 
isted for the creation of a holding company.' The power to buy 
and sell the stocks of other corporations, like all other corporate 
powers, is one derived from legislative authority; and during the 
period when "trusts" were being formed (1879-1887) no state 
had passed a general law specifically granting this privilege. 
Such few holding companies as existed had been created under 
special laws. One of the first holding companies of any con- 
sequence to be authorized was the Pennsylvania Company, 
chartered in the interest of the Pennsylvania Railroad Com- 
pany in 1870, and empowered "to make purchases and sales 
for investments in the bonds and securities of other companies. " 
The reason for this special enactment was to permit the Penn- 
sylvania Railroad to centralize the control of certain lines that 
were closely affiliated with it.^ 

An arrangement of somewhat the same sort was made use of 

by the Philadelphia and Reading Railway in the early seventies. 

This railway was anxious to possess anthracite coal properties 

in order to insure an ample coal traffic for the future. Under its 

charter, however, it had no authority to own coal lands. It 

ted in its interest the Laurel Run Im- 

hich was authorized by its charter to 

ine coal. The charter further provided 

ling company might be acquired by any 

>r mining company. Thereupon the 

g Railway proceeded to buy all the coal 

LIS indirectly it secured the power to act 

this particular instance.^ 

ceptional cases as these, the holding by 

Relalbns (second edition), sees, 5, 164 fT. 

; Pennsylvania Railroad, 1871, p. i<). 

«! Combination in the United States, p. 30. 



one corporation of stock in another corporation was not legal, — 
or at least had not been so held by the courts. And in view of 
the popular hostility towards trusts, which resulted in a wave of 
anti-trust legislation after 1889, it was hardly to be expected 
that any state would go out of its way to extend assistance to 
those who were searching for a new device to legalize their opera- 
tions. The unexpected, however, came to pass. It was the state 
of New Jersey that came to the rescue. 

Whether or not the legislators realized the full significance 
of their action,^ the state of New Jersey amended its corporation 
law in May, 1889, and provided that the directors of any com- 
pany organized under the act of 1875 might purchase " the stock 
of any company or companies owning, mining, manufacturing 
or producing materials, or other prof)erty necessary for their 
business," and issue its own stock in payment therefor.^ Four 
years later, in 1893, the doors were thrown completely open to 
the creation of holding companies by the enactment of a pro- 
vision that any corporation might purchase and hold the se- 
curities of any other corporation no matter in what state incor- 
porated, and might, while the owner, exercise all the rights of 
ownership.' No o()erating duties were required of the holding 
company; its duties were simply the ownership of stock, the 
election of officers and directors, the receipt of dividends from 
the constituent companies, and the payment of these dividends 
in whole or in part to its own stockholders. 

^ The charge has been made that some of the trusts "are a product of 
legislation obtained by their own lawyers and legislative agents, put quietly 
through under the cover of the anti-trust agitation, while the public, led by 
the newspapers, were looking somewhere else." Whitney, former Assistant 
Attorney General of the United States, Publications of American Economic 
Association, 3rd series, vol. 6, part II, p. 4 (Papers and Proceedings). 

* Dill, The Statute and Case Law of the State of New Jersey relating to 
Business Companies (1910), p. 80. 

*Dill, op. dt., p. 80. The section in full read: "Any corporation may 
purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of 
the shares of the capital stock of, or any bonds, securities, or evidences of 
indebtedness created by any other corporation or corporations of this or any 
other state, and while owner of such stock may exercise all the rights, powers 
and privileges of ownership, including the right to vote thereon." 


The example set by New Jersey was soon followed by other 
states determined to prevent New Jersey from securing a 
monopoly of incorporation fees and other fees and taxes. Among 
the numerous states that revised their general corporation laws 
to permit the creation of holding companies were Delaware, 
Maine, West Virginia, and New York, these states being con- 
spicuous for the " liberal " character of their legislation.^ 

One of the first companies to avail itself of the New Jersey 
legislation was the American Cotton Oil "Trust." Fearing 
lest the "trust" should prove illegal, it reorganized in New 
Jersey in October, 1889, as the American Cotton Oil Company, 
a holding company possessing the stocks of sixteen constituent 
concerns.* The American Cotton Oil Company also operated a 
large refinery in New Jersey on its own account, but it was 
primarily a holding company. 

In spite of the advantages of the holding company plan, 
however, few concerns availed themselves at once of the 
opportunity thereby afforded of organizing a trust. Thus, the 
Standard Oil " trust," though declared illegal in 1892 and obliged 
to reorganize, did not seek refuge in New Jersey, but relied 
instead on the community of interest plan. That more New 
Jersey holding companies were not formed is partly explained by 
the unsatisfactory state of business during the early life of the 
law, the period from 1893 to 1897 being one of severe industrial 
depression, when the flotation of new issues of securities would 
have proved diflScult; and partly by the fact that use was made 
of the other method of forming a modem trust, namely, the 
property owning corporation. 

Second. Most of the trusts or attempted trusts organized in 
the years immediately following the court decisions declaring 
the "trusts" or "trust" agreements illegal, took the form, not of 
a security holding company, but a property holding company. 
This second type of trust came into being in at least three 

> The statutes of the different states authorizing corporations to acquire 
stock in other corporations are given in Noyes on Intercorporate Relations 
(second edition), sec. 271. 

* Industrial Commission, XIII, p. 680. 

I i 



different ways: (i) by means of a consolidation or merger; (2) 
by means of purchase and sale; and (3) by means of exchange of 
property for stock.^ 

(i) Consolidation or merger may be defined as the union in 
one corporate body of two or more existing corporations.^ In 
effecting a consolidation the property and business of one or more 
companies is turned over to the consolidated company, whether 
or no this be a newly created corporation or one already existing.* 
By the act of consolidation the separate companies completely 
lose their identity, unless indeed their existence is maintained 
for some special purpose, such as the adjustment of claims.* The 

' In common usage the terms " purchase " and " sale " are applied to the 
acquisition by one corporation of the property of others in exchange for its 
stock (see Noyes on Intercorporate Relations, second edition,, sec. 319); 
and it may be, therefore, that our classification of prop>erty owning trusts is 
more minute than is necessary. 

' Some legal authorities make a distinction between a consolidation 
and a merger. Thus, Thompson, Law of Private Corporations (second 
edition) says, "there seems to be a recognized di£ference between 'consolida- 
tion' and * merger'" (sec. 6035). "Consolidation takes place where two or 
more existing corporations are consolidated into a single corporation, and the 
existence of the uniting corporations is terminated and the consolidated 
company succeeds in a general way to the rights and franchises and acquires 
the property and assumes the obligations and liabilities of all the constituent 
companies" (sec. 6035). A merger, on the other hand, "exists where one of 
the constituent companies remains in being, absorbing or merging in itself 
all the other companies" (sec. 6037). But in Judicial and Statutory Defi- 
nitions of Words and Phrases, 1914, p. 908, we are told that the terms con- 
solidation and merger are not always used with strict accuracy. As one 
authority puts it (ibid., 1904, p. 1452), the term consolidation is an elastic 
one, and may include a union of two or more corporations into a new one 
with a different name, with or without extinguishing the constituent cor- 
porations, or the merging of two or more corporations into one existing 
corporation under the name of the latter. See also Noyes on Intercorporate 
Relations (second edition), sees. 7-8. For our purposes there is nothing 
in particular to be gained by determining whether the property of the 
companies combined has been turned over to a new corporation or has been 
acquired by an already existing corporation; and we shall therefore use the 
words consolidation and meiger interchangeably. 

* See footnote above. 

♦Thompson on Corporations (second edition), sec. 6041. 


consolidation thus represents the complete fusion of two separate 

A consolidation is ultra vires unless authorized by legislative 
authority; and the legislature may withhold its consent entirely, 
or it may permit consolidation upon such conditions as it chooses I 
to impose.^ Legislative approval of consolidation may be given i 
in various ways.^ The legislature may provide for consolidation 
under a general corporation law; and most states through such , 
laws now permit the formation of consoUdations for lawful 
purposes. It may grant the constituent companies charters ; 
p>ermitting consolidation under certain conditions. It may even 
give its approval after the fact by the recognition of the consoli- 
dated corporation; and such legislative recognition is equivalent 
to legislative ratification. When the corporations to be con- 
solidated are creatures of different states the approval of each 
separate state, by general law or ./Otherwise, is necessary to ■ 
make the consolidation^ valid.' \ 

Yet even if the legislature has giyen its assent, no corporation 
can consolidate with another without the consent of the stock- 
holders. If the charter of a company gives it authority to 
consolidate, or if any general law in force at the time when the 
company was chartered permits consolidation, only the consent of 
a majority of the shareholders is required; otherwise the consent 
of all the shareholders is necessary.^ A dissenting stockholder 
in the latter case can not be compelled to give his assent, and his 
consent can not be implied. 

When the consent of the legislature and of the stockholders' 
has been secured, the process of effecting a consolidation, 
as already pointed out, is for the separate companies to 
transfer their property and assets to the consolidated com- 
pany, whereupon they become extinguished.^ The consoli- 
dated company is thus an operating unit, in contrast with the 

* Thompson on Corporations (second edition), sees. 6oif3, 6045. 

* Noyes on Intercorporate Relations (second edition), sec. 20. 
' Ibid., sec. 100. 

* Morawetz on Private Corporations, sec. 951. 

* Unless one of them becomes the consolidated company. 


holding company, which ordinarily is not an operating unit 
at all.^ 

(2) Purchase and sale. " It is an elementary principle of cor- 
poration law that a corporation, subject to the limitations of 
its charter and constitutional and statutory prohibitions, has 
inherent power to acquire and hold any property, real or 
personal, reasonably useful or convenient in carrying on the 
business for which it was organiz^lf ^ A private corporation — 
but not a quasi-public corporatiAi, such as a railroad — may 
even dispose of its entire property with the unanimous consent 
of the stockholders, providing the purpose is not unlawful nor 
fraudulent. If within the powers expressly granted to it, it may 
accept stock in other corporations in payment for the property 
sold. If the corporation whose property is to be disposed of is a 
losing one, the consent of only a majority of the stockholders 
suffices; and this is also true in the case of a prosperous corpo- 
ration, when the sale of its entire assets is made for legitimate 
business reasons.* Though some trusts were organized through 
sales to them of corporate property, it is hardly necessary to 
point out that such sales, if made for an unlawful purpose, 
were ultra vires of the corporation. 

It is necessary to distinguish between a sale and a consolida- 
tion. In a sale the vendor parts solely with its property, for 
which it receives a quid pro quo. The vendor may then proceed 
to buy further property, if it desires. But in a consolidation the 
vendor not only parts with its property, but also with the legal 
right to own or acquire property. Obviously the vendor could 
not receive any consideration for the transfer; for the act of 
consolidation involves its extinguishment. The fact that the 
consolidated company makes payment, not to the vendor 
corporation, but to its stockholders, characterizes the trans- 
action as a consolidation rather than a purchase; if the trans- 

^ For an excellent statement of the law relating to consolidation of corpora- 
tions, see Noyes on Intercorporate Relations (second edition), sees. 7-107. 

*Noyes on Intercorporate Relations (second edition), sec. 108. On 
the subject of sales of corporate property, see ibid., sees. 108-1 1 7. 

• See Warren, Harvard Law Review, 30, p. 358. 


action were merely a purchase and sale, the company acquiring 
property would pay the vendor corporation, which would then 
settle with ita stockholders. 

(3) Exchange of property for stock.' A private corporation 

may not only sell its entire assets, as just explained, but it mayl 

also exchange its assets for any other property that it is on-l 

powered to acquire. If the vendor corporation has power to hold 

stock in another corporation, it may transfer its prq)erty to the 

prt^Ktsed trust, and receive its stock in exchange. Such an 

exchange difieis from a sale in' this respect, inter alia, that a ia\e 

of the entire property, when incident to dissolution, may be 

accomplished on occasion through a majority vote; whereas an 

exchange of the entire property for stock requires the unanimous 

consent of the stockholders^ the majority ^nnot force the 

minority into-a new conipany against its -wiH, 

— TBestock received in the process of exchange belongs, of 

course, to the corporation that has transferred its property. But 

the corporation, with the unanimous consent of its stockholders, 

may oiter into an agreement that the stock, instead of being 

deUvered to it, shall be distributed among its stockholders pro 

rata. Such an agreement is the equivalent of a liquidation of the 

c<Hnpany's business by unanimous consent, but in the absence of 

statutory provisions to the contrary is a valid arrangement. 

On some occasions property owning trusts were formed 

through the use of the holding company as an intermediary stage. 

aving acquired a majority or all of the 

companies was obviously in a position, 

uired all of the stock, to cause the under- 

veyed to it, and the separate companies 

the ctsnpletion of these transactions the 

representing the title to plants, but the 

jst through the exchange of its stock for 
)anies to be united would appear to have 
early date by the same New Jersey law 
» on Intercoiporate Relations (second edition)| 



to which reference has abeady been made.^ By an amendment 
to section 55 of its general incorporation law of 1875 the state of 
New Jersey in 1889 authorized the directors of any company 
incorporated imder the act to purchase mines, manufactories, 
and other property necessary for their business, and to issue 
stock in payment therefor.^ Apparently New Jersey was not 
influenced by the popular clamor against jtfusts, and did not 
propose to stop at halfway measures of protection. 

The American Tobacco Company, incorporated in New 
Jersey in 1890, illustrates a proper^ owning trust, as distinct 
from a holding company trust. This com^ny, among the first 
of the modem trusts, exc hanged its ^apHdX^tut k /directly for 

tV^P plants h^|<^ine<^<^ l^mnHq^ |^pH ^f"^^ W^" ^^ ^^^ cigarette 

companis^^ The Continental Tobacco Company (the plug 
tobacco trust), organized in New Jersey in 1898, was the same 
type of trust,^ as was also the second American Tobacco 
Company, organized in 1904 for the purpose of uniting a number 
of tobacco concerns (including the original American Tobacco 
Company and the Continental Company) that had been held 
together since 1901 through the Consolidated Tobacco Company 
(a holding company). 

The American Sugar Refining Company, incorporated in 
New Jersey in 1891, is another early property owning trust.^ 
The Sugar Refineries Company (the "trust") having been 
declared illegal, the trust certificates, by agreement among all 
the parties, were exchanged for the shares of the American 
Sugar Refining Company. Through the acquisition of these 
trust certificates, the American Sugar Refining Company 

* See p. 30. 

' See the General Law of the State of New Jersey concerning Corpohitions, 
approved April 7, 1875, together with Acts Amendatory thereto in force 
July I, 1889, p. 34. 

* Report of the Commissioner of Corporations on the Tobacco Industry, 
part I, p. 65. 

* Report of the Commissioner of Corporations on the ToKacco Industry, 
part I, pp. QQ-ioo. 

* Original Petition in United States v. American Sugar Refining Company, 
pp. 47-50- 


secured control over all the stock of (he various corporations "■ 
formerly controlled by the trustees. It was thus temporarily a 
holding company. The next step was to have the several 
corporations convey to it their entire property, whereupon they 
were dissolved. The result was to make the American Sugar 
Refining Company the actual owner of all the property pre- 
viously held in trust by the trustees under the Sugar Refineries 
Company deed. 

In passing, the relative merits of holding company trusts and 
property owning trusts from the standpoint of trust managers 
may be briefly reviewed.' The chief advantages of the holding 
company are : (1) it makes possible the creation of a centralized 
a dministration j__aDd 1^ at the same time maintains the in- 
divid uality of_ the c onstituent companie s, together with the 
■fpood jvill a ttaching to their busines s; (2) throu gh the incor- 
poratioiLo f individu al concern s in t he separate sta tes, i t is able 
more easi jy jo comp ly withJJie l aws o f the various states , such 
as, for e xample t^ a law that foreign corporations may not ho ld 
real^ ^Se; iind (.^) it is easy to form, because it is necessary to 
acquire only a majority of the stock of the separate companies. 

On the other hand, it is open to serious objections; (i) the , 
perpetuation of the individual concerns whose stock is acquired * 
results in the creation of a complex business and financial 1 
structure, a set of wheels within wheels, that does not conduce to 
the maximum operating and financial efficiency; and (2) in case 
all the stock of the constituent concerns is not acquired, the con- 
gh the ownership of only a part of the 
rom ownership in large measure, and 
to the manipulation of accounts, and 
of stockholders in the interests of an- 
iatisfaction and friction, 
ist that owns the propertyoutrightare: ' 
operttting unit with a resulting con- 
esponsibility — under this type of trust 
nth a lot of individual companies, each 
at greater lenglh, see Hancy, Business Organ- 


having its own officials and organization, and to substitute there- 
for a single concern dominated by singleness of purpose; and (2) 
by uniting all the property in one concern it makes the interests 
of each the interests of all, and thus eliminates that '^milking" of 
one group by another which occurs not uncommonly under the 
holding company device. The disadvantages are: (i) it sacrifices 
the independence of the separate concerns, and thus their fran- 
chises and firm names; (2) it can not accommodate itself so 
readily to local conditions; and (3) it is more difficult to form, 
because of charter and statutory restrictions. Nevertheless, as 
we shall see, trusts more generally took this form rather than 
the holding company form. 

The general character of the trust movement has been in- 
dicated. There remains to consider its extent. 

The extent of the movement toward combinatian can be 
statistically stated with a fair d^ree of precision, and several 
such compilations are available.^ A similar statistical study of 
the trust movement, however, can not be made by an independ- 
ent investigator; to secure the requisite data in fullness requires 
the resources and authority of a governmental agency. To dis- 
cover and enumerate all the combinations of a certain size (say 
capitalization) is easy; but to determine in each instance whether 
the combination realized monopoly control (that is, was a trust) 
is quite another matter. The attempt to make such a com- 
putation is rendered more difficult by the fact that a combina- 
tion at its organization may not possess monopolistic powers, 
but subsequently may acquire them. The National Cordage 
Company is a case in point. It has seemed best, therefore, to 
indicate the extent of the trust movement by using the statistics 
for the combination movement, with a caution against a too 
literal interpretation of the figures as bearing on the trust 

An excellent statistical study of the industrial combinations 
formed in the United States through 1900 has been made by Mr. 

>See, for example, Conant, Publications of the American Statistical 
Association, 7, pp. 208-217 (March, 1901); U. S. Census, 1900, vol. 7, 
pp. LXXXVI seq.; and Moody, The Truth about the Trusts, pp. 453 seq. 


Luther Conant, subsequently C(»mnissioner of Corporations.^ 
The following table, prepared by him, shows the number of in- 
dustrial ccmibinations, with a capital of $1,000,000 or over, ef- 
fected from 1887 to 1900, with their authorized capitalization: 

Total capikUwtion, 
Year Number of combinations stocks and bonds 

1887 8 $2l6,226,OCX> 

1888 3 23,6oo,ocx> 

i88g 12 i52,i79,ocx> 

1890 13 i5S,i56/x)o 

1891 17 166,200,000 

1892. 10 193,412,000 

1893 6 239,oi5/x)o 

1894 2 30,400,000 

1895 6 107,255,000 

1896 5 49,850,000 

1897 4 81,000,000 

ToUl (1887-1897) 86.. 4i,4i4»293,ooo 

1898 20 $708,600,000 

1899 87 2,243,995,000 

1900 42 831,415,000 

Total (1898-1900) 149 $3,784,010,000 

Total (1887-1900) 235 $5ii98>303»ooo 

During the eleven years 1887-1897, therefore, there were 
formed 86 industrial combinations with an authorized capital 
of $1,414,000,000. Some of these combinations were trusts 
also, that is, they exercised monopolistic control over the 
industry; but by far the greater number were simply combina- 
tions. The list includes five brewing companies, each a combi- 
nation, but none of them a trust; and the whisky trust in its 
various forms is counted three times. The list includes the sugar 
trust twice, once as the Sugar Refineries Company, and again as 
the American Sugar Refining Company. It includes four steel 
companies, none of which was a trust. The number of actual 

* Publications of the American Statistical Association, 7, pp. 207-226 
(March, 1901). 


trusts formed from 1887 (the date of the formation of the last 
"trust") to 1897 is thus considerably less than the number of 
combinations. Probably not more than twenty, or at most 
twenty-five, of these combinations secured a sufficient control 
of the industry to be called trusts. 

Among the more important trusts formed between 1887 and 
1897 were the following: National Cordage Company (1887); 
American Cotton Oil Company (1889); Diamond Match Com- 
pany (1889);* American Tobacco Company (1890); Distilling 
and Cattle Feeding Company (1890); National Starch Manu- 
facturing Company (1890); American Sugar Refining Company 
(1891); National Wall Paper Company (1892); United States 
Leather Company (1893); American Malting Company (1897); 
and Glucose Sugar Refining Company (1897).^ 

Nearly all of these trusts represented combination by consoli- 
dation or purchase rather than by means of a holding company. 
The cordage, match, cigarette, whisky, starch, sugar, leather, 
malt, and glucose trusts were property owning combinations. 
The cotton oil trust, on the other hand, was a holding company. 
No doubt there were others that took this form also, though the 
paucity of data on this subject makes it difficult to determine 
just which ones they were. 

The real trust movement, however, dates from 1898. This 
is indicated by the statistics for combinations. Reference to the 
table on page 39 shows that in the years 1898 to 1900 there 
were formed 149 combinations, with a total capital of $3,784,- 
000,000. In three years almost twice as many combinations were 
formed as in the preceding eleven years; and the capital of the 
combinations organized during the shorter period exceeded by 
more than two and one-half times the capital of those organized 
during the longer period. In the year 1899 alone, when the trust 
movement reached its climax, more combinations with a much 
larger aggregate capitalization were formed than in the eleven 

*This company, incorporated in Illinois, was a successor to another 
company of the same name incorporated in Connecticut in 1880 for the pur- 
pose of monopolizing the match industry. See 77 Michigan Reports 635. 

• Seven of these eleven trusts were chartered in New Jersey. 


years from 1887 to 1897. The absorption of this mass of se- 
curities proved to be such an enormous task that in the latter 
part of 1899 and in 1900 the promoters had difficulty in induc- 
ing the bankers to float and the public to buy new issues. Never- 
theless, 42 combinations with a combined capitalization of 
$831,000,000 were formed in 1900. 

As in the period 1887-1897, by far the greater nimiber of 
these combinations were simply combinations; they did not re- 
sult in the formation of an organization large enough to control 
the industry. In the list of 149 combinations, we find, for ex- 
ample, seventeen in the steel industry. Several of these unques- 
tionably possessed a degree of monopoly control over certain 
kinds of steel products — the American Steel and Wire Company 
of New Jersey, the American Tin Plate Company, the National 
Tube Company, and the Shelby Steel Tube Company are prop- 
eriy designated as trusts. But just as clearly, certain other of 
these steel combinations were in no sense trusts. This was true 
of the Empire Steel and Iron Company, the Republic Iron and 
Steel Company, the Sloss-Sheffield Steel and Iron Company, 
Jones and Laughlin, and several others; and was even true of 
such enormous combinations as the Federal Steel Company, the 
National Steel Company, and the Carnegie Company, each a 
vigorous competitor of the others, as subsequent events well 
demonstrated. We also find in our list of combinations nine in 
the liquor trade, in addition to those effected prior to 1898. For 
the most part these were merely local combinations. In addition 
there were four tobacco combinations, three brick and three fer- 
tilizer combinations, and two ice and two biscuit combinations. 
Most of these concerns obviously were not trusts. Though 
most of the companies promoted from 1898 to 1900 were simply 
combinations, it is still true that this was the period during 
which the modem trust movement reached its height. Some 
forty to fifty of these combinations achieved a monopolistic posi- 
tion in their particular industry; and this was approximately 
— an approximate statement is all that can be made — twice the 
number of trusts organized during the preceding eleven years. 

Some of the leading trusts organized during 1898-1900 were: 


the American Tin Plate CcHnpany (1898); Continental Tobacco 
Company (1898); International Silver Company (1898); Inter- 
national Paper Company (1898); American Linseed Company 
(1898); Otis Elevator Company (1898); Standard Oil Company 
of New Jersey (1899);^ United Shoe Machinery Company (1899); 
American Steel and Wire Company of New Jersey (1899); 
National Tube Company (1899); American Bicycle Company 
(1899); American Chicle Company (1899); Asphalt Company 
of America (1899); National Glass Company (1899); National 
Salt Company (1899); Standard Sanitary Manufacturing Com- 
pany (1899); New England Cotton Yam Company (1899); 
Mount Vemon-Woodberry Cotton Duck Company (1899); Amer- 
ican Sheet Steel Company (1900); Shelby Steel Tube Company 
(1900); and American Snuflf Company (1900).* By no means 
all of these companies retained their monopolistic hold for any 
considerable time, yet all of them either at their organization or 
shortly thereafter exercised monopoly control. 

There were other trusts established during this period that 
were so notably unsuccessful that one hesitates to class them 
with the above. Among them were the following: National 
Shear Company (1898); United States Envelope Company 
(1898); American Hide and Leather Company (1899); and 
American Writing Paper Company (1899). Indeed some of the 
trusts in the earlier list might well be placed in this group, 
particularly the American Bicycle Company, the National Salt 
Company, the New England Cotton Yam Company, and the 
Mount Vemon-Woodberry Cotton Duck Company. 

Comparatively few of the tmsts formed between 1898 and 
1900 were holding companies. The most striking exception was 
the Standard Oil Company of New Jersey, which adopted the 
holding company plan as a substitute for the conmiunity of 
interest arrangement that had been in force since 1892, but 
which it seemed wise to abandon in 1899 in view of the attacks 
being made upon it by the state of Ohio. 

^ Reorganization as a holding company. 

• Eighteen of the twenty-one trusts enumerated above were incorporated 
in New Jersey. 


Even after 1900, when there was somewhat of a lull in the 
trust movement, the formation of trusts continued on a large 
scale up to 1904. A table prepared by Mr. John Moody gives a 
list of the combinations organized to 1904.^ From this table it 
a{q[)ears that 46 combinations (each with an outstanding capital 
of SiyOoOyOoo or over) were formed in 1901 ; 63 in 1902; and 18 in 
1903, making a total of 127 during the three years. If we note 
that Mr. Moody's list is not as exhaustive as Mr. Conant's,^ 
it would appear that substantially as many combinations were 
formed during the three years from 1901 to 1903 as during the 
three years from 1898 to 1900. A detailed study of the combin- 
ations organized between 1901 and 1903, however, reveals the 
fact that they were mainly combinations of limited scope; the 
number of them that were trusts was distinctly less than in the 
preceding three-year period. Hardly more than twenty of them 
were trusts, as compared with some forty or fifty diuing 1898 to 
1900. The leading trusts organized between 1900 and 1903 were: 
the United States Steel Corporation (1901) ; American Can Com- 
pany (1901); International Harvester Company (1902); Com 
Products Company (1902); and International Nickel Company 
(1902).' During this period also a number of important re- 
organizations took place. The Consolidated Tobacco Company 
was formed in 1901 to unite, through the holding company ar- 
rangement, the American Tobacco Company (the cigarette 
trust) and the Continental Tobacco Company (the plug tobacco 
trust). Other companies that represented trust reorganizations 
ol one kind or another were: Eastman Kodak Company (1901); 
International Salt Company (1901); United States Cotton Duck 
Corporation (1901); Distillers Securities Corporation (1902); 
American Coal Products Company (1903); General Asphalt 
Company (1903) ; E. I. du Pont de Nemours Powder Company 
(1903); P<^ Manufacturing Company of New Jersey (1903).* 

* The Truth about the Trusts, pp. 453-467. 

* For example, Mr. Conant included all combinations having an authorized 
capital of $1,000,000 or more, whereas Mr. Moody included only those hav- 
ing an ouistanding capital of this amount. 

* All of these five trusts were incorporated in New Jersey. 

* A reorganization of the American Bicycle Company. 


In 1903 a merger of the leading meat packers was proposed, but 
it did not come to pass. Instead the National Packing Company 
was organized, and throiigh it a community of interest was 
eflFected, or, perhaps one should say, maintained. 

The organization of trusts seems to have come rather def- 
V initely to an end by the close of 1903. iThe stock market panic 
of 1903, ascribable to the large mass of '* undigested securities"; 
^ the popular opposition to trusts that was reflected in the crea- 
tion of the Bureau of Corporations in 1903 y the Northern Se- 
y curities decision in 1904, casting by implication grave suspicion 
on the legality of trusts — all combined to dull the public appetite 
for trust stocks, and thus to make their manufacture no longer 
particularly profitable. Moreover, by the close of 1903, most 
of the industries that were at all adapted to monopolization, 
and many that were not, had been "trustified"; and accord- 
ingly the period that followed was mainly characterized by the 
endeavor, often unsuccessful, of the trusts to hold the position 
they had gained. 

Whereas up to 1900 the most common form of trust organiza- 
tion was a single corporation owning the various properties out- 
right,* after 1900 and up to the Northern Securities decision the 
holding company form vied with it in popularity. The steel 
trust was a holding company trust; the cigarette and plug to- 
bacco trusts were tied together through a holding company; and 
holding companies were made use of in the gunpowder, whisky, 
and meat industries. On the other hand the harvester, tin can, 
and glucose trusts took the property owning form; and the 
powder trust proceeded to substitute this form for the holding 
company. But in 1904 the Supreme Court in the Northern 
Securities case ^ held the combination of two competing railroads 
through a holding company to be illegal, and thereafter the 
other type of organization came into renewed favor. In the to- 
bacco industry, for example, there was straightway formed the 
second American Tobacco Company, which proceeded to ac- 
quire the property of the concerns formerly controlled by the 

* See Industrial Commission, I, p. 10 (ReWew of Evidence). 
« See p. 399. 


Consolidated Tobacco Company, the holding company organ- 
ized in 1901. Yet the property holding corporation, like the 
holding company, could not pass the legal tests, when entered 
into, as in this instance, to effect an illegal object. In 191 1 the 
Supreme Court held the tobacco merger illegal. In the same 
year the Supreme Court adjudged the Standard Oil Company of 
New Jersey illegal, not because it was a holding company, but 
because it had effected a restraint of trade. From these de- 
cisions it clearly appears that neither the holding com])any nor 
the maimer is l^al, when used to effect an ill^al object. 


Mr. G. H. Montague in the preface of his book "The Rise and 
Progress of the Standard Oil Company" observes that the oil 
business, in its early phase, was the reflex of prevalent railway 
methods, and that it is not fair to attempt to judge the situation 
without first ascertaining the standards set by the railway 
management of the time. It does not fall within the province of 
this treatment to judge the Standard Oil Company, but merely 
to point out some of the methods by which it acquired its power. 

The first successful oil well was drilled at Titusville, Pennsyl- 
vania, in 1859. This great event was followed by the discovery 
of other oil deposits, and by the rapid development of the demand 
for refined petroleum products. At that time Mr. John D. Rocke- 
feller, only twenty years of age, was engaged in the produce 
commission business on the Cleveland docks. But Mr. Rocke- 
feller early foresaw the possibilities in the oil business, and in 
1862 he and his partner, who had made excellent profits in the 

* On the Standard Oil Company see: Report of the Commissioner of Cor- 
porations on the Transportation of Petroleum, May 2, 1906; Report of the 
Commissioner of Corporations on the Petroleima Industry, part I, Position of 
the Standard Oil Company in the Petroleimi Industry (May 20, 1907), and 
part II, Prices and Profits (August 5, 1907); Report of the Federal Trade 
Commission on Pipe-Line Transportation of Petroleum; Report of the 
Federal Trade Commission on Price of Gasoline in 191 5; Brief for the United 
States, in two volumes, in Standard OO Company v. United States (no. 725); 
Brief for Appellants (Standard Oil Company et al.)} in two volumes, in 
Standard Oil Company v. United States (no. 725); 173 Fed. Rep. 177-200; 
221 U. S. i-io6; House Report no. 3112, 50th Cong., ist Sess.; Industrial 
Commission, vol. I, pp. 261-800; 49 Ohio State Reports 137-189; 218 Mis- 
souri Reports 1-507; Tarbell, The History of the Standard Oil Company, in 
two volumes; Lloyd, Wealth Against Commonwealth; Montague, the Rise 
and Progress of the Standard Oil Company. (For full titles see the Bibli- 



produce business as the result (rf the unusual demands created by 
the Civil War, invested $4,000 in an oil refinery, which one 
-Samuel Andrews was anxious to start. Mr. Andrews proved to 
be a mechanical genius, and the little refinery at Cleveland be- 
came quite profitable. In 1865 Mr. Rockefeller disposed of his 
interest in the commission house, and entered into a partnership 
with Mr. Andrews. The partnership of Rockefeller and Andrews 
associated itself also with Mr. William Rockefeller in the firm of 
William Rockefeller and Company, and this new firm built 
another refinery on property adjacent to the works of Rocke- 
feller and Andrews. These two concerns then organized the firm 
of Rockefeller and Company, a selling agency with headquarters 
at New York City. Mr. Rockefeller was one of the first to see 
that by producing on a larger scale improvements in the process 
of refining could be brought about, and the by-products more 
efiFectively utilized. In 1867, therefore, the three Rockefeller 
firms united witbOJie firms S. V. JIarkness and H. M. Flagler into 
a new concern called Rockefeller, Andrews and Flagler. 

In 1870 (June) the Standard Oil Company of Ohio was 
incorporated with a capital stock of $1,000,000. This company 
took over the properties of the partnership to which it suc- 
ceeded. The Standard Oil Company was, even at this time, the 
largest oil concern in the country. It produced about 10 per 
cent of the country's output of refined oil.^ But it operated no 
refineries outside of Cleveland, was not engaged in the production 
of crude oil, and had as competitors some 250 concerns.^ By 
1879, however, the Standard Oil Company, according to the 
statement of its officials, controlled from 90 to 95 per cent of the 
refining business of the coimtry.' By what means was a com- 
pany occupying such a modest position in 1870 able so efiFec- 
tively to eliminate its competitors? According to the Commis- 
sioner of Corporations, "imquestionably, the most important 
single element in this early extension of the company's power 

' Report of the Commissioner of Corporations on the Petroleum Industry, 
part I, p. 48. Referred to hereafter as Report on the Petroleum Industry. 

* Report on the Petroleum Industry, part I, p. 48. 

* Report of Hepburn Committee (New York), pp. 2615, 2695. 


was the railroad rebate. " ^ It is true that the progress of the in- 
dustry in the seventies necessitated production on a considerable 
scale, and that the refiners who were not able to expand their 
operations were doomed in the competitive struggle. But the 
economies of large-scale production were secured by a consider- 
able number of refiners, and hence the ability to produce on a 
large scale does not explain the growing preeminence of the 
Standard Oil Company — ^and especially since advantages in 
freight rates easily more than offset unusual economies in 

The real struggle in the seventies, therefore, was to secure 
special railroad rates. And the railroad situation was such that 
the opportunities in this direction were exceptional. There had 
been rate wars between the Pennsylvania Railroad and the New 
York Central Railroad as early as 1869, the year in which both 
of these roads secured connection with Chicago. With the 
entrance into Chicago during the seventies of other railroads — 
notably the Baltimore and Ohio and the Grand Trunk — 
competition among the railroads for traffic became still more 
intense. The Standard Oil Company, as it happened, was well 
situated to demand special rates on its oil traffic. Its refineries 
at Cleveland were served by two railroads to New York City — 
the New York Central and the Erie — and also had water 
conmiunication to the East by way of the Great Lakes and the 
Erie Canal. If railroad rates were unsatisfactory, there was this 
alternative water route. The railroads thus found themselves 
compelled to grant greater and greater concessions to the 
refiners at Cleveland, and the Standard Oil Company being the 
largest refining concern naturally received at least its share. But 
the Standard Oil Company was ambitious, apparently, to secure 
a still larger share; and through the South Improvement Com- 
pany scheme was successful in efifecting this end. 

The South Improvement Company was a Pennsylvania 
corporation organized in January, 1872, under a charter granted 
in 1870, conferring almost unlimited powers.^ The South 

* Report on the Petroleum Industry, part I, p. 22. 
« Ibid., p. 55. 



Improvement Company, which was backed mainly by certain re- 
finers in Cleveland and Pittsburg, was controlled by the Stand- 
ard Oil group. The function of this company wa s to negotiate 
with the railr ^ids lor speciaFrates i n retur n for the privil^e 
of car^thg "tS elarge amo unt of trafSc at the disposa l of the 
conipany — rates much lower San were to be given to refiners not 
included in the South Improvement Company organization. 
In this plan the company was highly successful. It entered into 
contracts with the Pennsylvania Railroad, the New York 
Central, and the Erie, whereby its oil traffic was to be divided 
among these three railroads in certain proportions.^ These 
contracts specified the rates on oil from the oil fields to the 
refining centers and to the seaboard, and expressly provided for 
rebates from these gross rates on all oil transported for the South 
Improvement Company. They further provided that similar 
rebates should be given to the South Improvement Company on 
all oil carried for other parties. As is brought out in a table in 
the report of the Commissioner of Corporations, the rebates 
ranged from about 40 to 50 per cent of the gross rates in the case 
of crude oil, and from about 25 to 45 per cent in the case of 
refined oU.* Moreover, the contracts had other objectionable 
features. They established very much higher gross rates on 
refined oil from points in the oil regions than applied from Cleve- 
land and Pittsburg, where the leading concerns in the South 
Improvement Company were located (the rates from the oil 
r^on should have been at least as low, and perhaps lower than 
those from either Cleveland and Pittsburg); and they provided 
that *^** Sv\1th Tmprn^'^""^""^ -^^^^^p^'^y should be supplied 
with ^plicate co p in of th" wf i yH^I " "f nH ^^'^ f^hip^f" *^^. 
these waybills to show the name of the consignor, the place of 
shipment, the exact kind and quantity of product shipped, the 
name of the consignee, and the destination of the shipments. 
The South Improvement Company, as the Commissioner of 
Corporations pointed out, was thus to be provided with 

* A copy of the contract entered into with the Pennsylvania Railroad is in 
House Report no. 31 12, 50th Cong., ist Sess., vol. 9, pp. 357-361. 
' Report on the Petroleum Industry, part I, p. 56. 



xromplete facilities for e^ionage upon the shipments of its 

The South Improvement CcHnpany with its favorable con- 
tracts thus became a powerful dub, which mi^t be used by the 
Standard Oil Company in the fight against its competitors. The 
government in its suit against the Standard CMl Company 
charged that it was clearly the intention of the South Im- 
provement Company to use these contracts to force into the 
Standard Oil Company such refineries as were wanted, and to 
crush out the balance.* This certainly to a considerable degree 
was the outcome. Within three months practically the entire 
independent oil business of Cleveland succumbed. At least 
twenty of the twenty-five independent refineries sold out to the 
Standard. As a result the capacity of the Standard Oil Com- 
pany increased from about 1,500 barrels of crude oil a day to 
10,000 barrels a day.^ The Standard Oil Company upon the 
completion of this transaction had a capacity greater than that of 
all the refiners in the oil creek regions put together, and greater 
also than that of all the New York refiners. Whereas in 1870 it 
had refined about 10 per cent of all the oil in the country, it now 
refined over 20 per cent. 

The South Improvement Company contracts, signed on 
January 18, 1872, went into effect on February 26.* Naturally 
they aroused the most bitter antagonism on the part of the inde- 
pendent oil interests. A mass meeting was promptly held at 
Titusville, Pennsylvania, and an organization to fight the South 
Improvement Company was formed. An embargo was at once 
imposed on the sale of oil to the South Improvement Company, 
and committees were sent to the l^islature of Pennsylvania and 
to Congress to enter protest. 

This agitation produced thedesired effect. On March 25, 1872, 
the railroads signed a contract with the independents that all 
shipping of oil should hereafter be made on '*a basis of perfect 
equality to all shippers, producers, and refiners, and that no 

* Brief for the United States (no. 725), vol. I, p. 12. 

■ Tarbell, The History of the Standard Oil Company, vol. I, pp. 67-68. 

* Montague, Rise and Progress of the Standard Oil Company, p. 28. 


rebates, drawbacks, or other arrangements of any character 
shall be made or allowed that will give any party the slightest 
difference in rates or discrimination of any character whatever." ' 
On March 28 the railroads officially annulled their contracts 
with the South Improvement Company, and put into force a new 
. schedule of rates ranging about 40 per cent lower than those 
stipulated in the contracts. And on April 6, 1872, the legislature 
of Pennsylvania deprived the South Improvement Company of 
its charter. 

Yet the Standard Oil Company continued to receive special 
rates. In 1879 Mr. H. M. Flagler, Mr. Rockefeller's partner, pro- 
duced, beforean Ohio Legislative Committee, contracts showing 
that from the first of April, 1872, to the middle of November, 
1872, the Standard Oil Company had an east-bound rate on the 
NewYork Central of $1.25 per barrel of refined oil. This was 25 
cents less than that provided for in the agreement of March 25, 
1872, between the railroads and the independents,' Other 
instances of rebates in the seventies are cited in the report of the 
Commissioner of Corporations.* According to theCommissioner, 
at almost every turn rates were adjusted or manipulated in favor 
of the Standard Oil Company, and these favors were shown 
the company at a time when they were of peculiar value — that is, 
when it was endeavoring to establish its supremacy in the oil 
industry.* During this early period rebates were given to inde- 
pendent shippers also, but the concessions obtained by the 
Standard Oil interests were much greater than those obtained by 
their competitors. 

Having acquired the refineries in its own district (Cleveland), 

the Standard Oil Company proceeded to extend the sphere of its 

athered in the important refineries of 

l»ny of Philadelphia, Charles Lockhart 

es Pratt and Company of New York. 

oth Conp., 1st Sess., vol. 0, p. 361. 

he Slandani Oil Com|>.iny, vol. I, p. 100. See 

Tndustry, p.-irt I, pp. 58 fF. 


The subsequent acquisitions of the Standard Oil Company were 
promoted by the organization in 1874 of an "alliance" known as 
the Central Association of Refiners, Mr. John D. Rockefeller 
being its president. This association, which reminds one in some 
respects of the South Improvement Company, included a large 
percentage of the refining capacity of the country. The 
association agreement provided that the members were to 
operate their own refineries, but that the Standard Oil Company 
was empowered to determine the quantity of their output, to buy 
all their crude oil and to sell all their refined oil, and to negotiate 
with the railroads and pipe-lines as to freight rates.^ It was thus 
a pool, and one that was able to bring great pressure to bear on 
the carriers. The formation of this association was followed by 
the rapid decline of the independent element. Within three or 
four years practically all of the independent refiners in the oil 
regions of northwestern Pennsylvania had either gone out of 
business or had sold to the Standard party.^ Simultaneously, the 
independent group in the Pittsburg district was being rapidly 
absorbed; between 1875 and 1877 some twenty independent 
plants were acquired by Standard Oil interests. By 1877, more- 
over, practically the entire group of independent refiners in Bal- 
timore had succumbed. As the result of these acquisitions, 
made possible in many cases by pressure, the Standard Oil' 
Company and allied interests had secured by 1879, as noted 
above, from 90 to 95 per cent of the refining capacity of the 

The Standard Oil Company was greatly aided in this enlarge- 
ment of its business by its control of pipe-lines for transporting 
crude oil from the oil wells to the railroads. The building of 
local pipe-lines in the oil fields was begun in 1865. The Standard 
Oil Company did not originate pipe-line transportation, nor 
did it build any of the lines laid down in the first eight years.' 
But quite early its guiding spirits realized the imix)rtance of 
getting control of the pipe-lines. The entrance of the Standard 

' Report on the Petroleum Industr>', part I, pp. 4(^-50. 

* Ibid., p. 50. 

* Brief for the United States (no. 725), vol. I, pp. 45-46. 


Oil group into the pipe-line business came in 1873. In that year 
J. A. Bostwick & Company — Mr. Bostwick was affiliated with the 
Standard Oil Company — built a local pipe-line in northwestern 
Pennsylvania. This concern later became the American Trans- 
fer Company, and as such was definitely a part of the Standard 
organization. In 1874 Standard Oil interests secured one-third 
of the stock of the United Pipe Lines, a company credited with 
30 per cent of the pipe-line business of the Pennsylvania oil 
fields region. The United Pipe Lines with its new affiliations 
was able to secure favors from the railroads. It entered into an 
agreement with the New York Central and the Erie, by which 
it was to apportion to each road 50 per cent of its traffic, and in 
return was to receive a rebate of 10 per cent on all its shipments.^ 
The other pipe-line systems likewise arrayed themselves with 
some railroad. The Empire Transportation Company allied 
itself with the Pennsylvania Railroad, and began the construc- 
tion of oil refineries. The Standard Oil Company, not welcom- 
ing competition, and particularly when backed by railroad 
support, demanded, but without success, that the Empire Trans- 
portation Company give up its refineries. At the suggestion of 
the New York Central and the Erie, which would have been in- 
jured by the resulting diversion of oil traffic to the Pennsylvania, 
the Standard Oil Company in March, 1877, ceased shipping 
freight over the Pennsylvania. This precipitated a stru^le, 
which lasted for six months. In one instance the Pennsylvania 
transported oil at a rate that was 8 cents per barrel below cost,^ 
and the Empbe Transportation Company sold oil in the terri- 
Uliance" at very low prices. But the 
with its allied railroads proved the 
[877, the Pennsylvania Railroad aban- 
jld the Empire Transportation Company 
ipany. The Pennsylvania Railroad and 
ny then entered into a contract whereby 
ide its traffic among the Pennsylvania, 
the Erie, and the Baltimore and Ohio, 
mittee (New York), pp. 17s, 182. 
[oth Cong., 1st Scss., vol. g, p. 176. 


and in return was to receive a rebate of lo per cent on all freight 
after May i, 1878 (when the contracts of the Pennsylvania 
with its shippers were to expire).^ 

In the same year (1877) the Standard Qil Company acquired 
the Columbia Conduit Company, the only important indepen- 
dent pipe-line remaining in the oil regions. By the close of the 
year, therefore, the Standard Oil interests had obtained control, 
through stock ownership, of substantially all the pipe-lines in the 
oil region.* Hardly a barrel of oil could be brought to the rail- 
roads without the consent of the Standard organization. Mr. 
Rockefeller had begun with an ambition to be the only oil 
refiner in the country, but he had found it necessary in carrying 
out this purpose to secure control of the pipe-line system. The 
result, incidentally, was the acquisition of great power over the 
railroads, — power which was to assist in the maintenance of the 
monopoly which he had succeeded in building up. 

The independents, however, died hard. To free themselves 
from the dominance of the Standard Oil Company, they organ- 
ized in November, 1878, the Tide Water Pipe Company to con- 
struct a pipe-line from the oil fields of northwestern Pennsylvania 
to the seaboard, a distance of 109 miles.^ The oil was to be 
pumped over the Alleghany Mountains. Up to this time oil had 
never been pumped more than 30 miles, and no considerable 
elevation had been overcome. The project was deemed quite 
impracticable both by the Standard Oil Company and by the 
railroads. Nevertheless, success crowned the venture. In June, 
1879, oil flowed over the mountains, and into the receiving tank 
located on the eastern side. A new era in the oil business seemed 
to be at hand. Clearly it was but a matter of time before the 
Tide Water Pipe Company would pump oil into New York City, 
where there were a number of refiners anxious to free themselves 
of their dependence on the Standard Oil Company and the rail- 
roads. To meet this situation the Standard Oil Company acted 

* Montague, The Rise and Progress of the Standard Oil Company, pp. 


* Brief for the United States (no. 725), vol. I, p. 46. 

* Tarbell, The History of the Standard Oil Company, vol. 11, p. 4. 


with its usual dispatch and skill. The local pipeage rate was re- 
duced by the Standard pipe-lines; and thethrough rate on crude 
oil was reduced by the railroads, in order to prevent this traffic 
from being lost to them, — the traffic would no longer bear the 
former rate. The railroad rate from the oil fields to New York 
Harbor, for example, was reduced from $1.15 per barrel to 30 
cents.* The Standard Oil Company was given an even lower 
rate — 20 cents — ^but in spite of this discrimination in its favor it 
remained at a disadvantage. According to an estimate of the 
engineer who built the independent pipe-line, oil could be piped 
to seaboard for 16 2/3 cents per barrel.^ Apparently the day 
of the railroad as a long distance transporter of crude oil was 

The Standard Oil interests, however, did not delay action 
until the outcome of the struggle between the railroads and the 
long distance pipe-line was known. Hardly had the new line - 
proven a success, when the Standard interests began to build 
pipe-lines from the oil fields to Bayonne, New Jersey, to Phila- 
delphia, and to the inland refining points at Pittsburg, Cleve- 
land, and Buffalo. To cany on this vast program — destined to 
make the Standard Oil Company independent of the railroads 
with respect to the transportation of crude oil — the National 
Transit Company was incorporated in April, 1881, with a capital . 
of $5,000,000.' 

Meanwhile, the Standard Oil Company acquired most of the 
independent refineries about New York Harbor which the Tide 
Water Pipe Company proposed to feed.^ To protect themselves, 
the supporters of the Tide Water Pipe Company at once began to 
build several refineries on the seaboard, the oil being stored 
pending their completion. Subsequently the Standard Oil Com- 

^ Report of the Commissioner of Corporations on the Transportation of 
Petroleum, p. 86. Referred to hereafter as Report on Uie Tran^x>rtation 
of Petroleum. 

•Tarbell, The History of the Standard Oil Company, vol. II, p. 11. 

* Report on the Petroleum Industry, part I, p. 53. The United Pipe Lines, 
a system of local gathering lines, was transferred to the National Transit 
Company^ — the trunk line system — in 1884. 

* Report on the Petroleum Industry, part I, p. 53. 


pany contrived to acquire a minority of the company's stock. ^ 
This action, together with the determined (^position of the rail- 
roads, led to a practical surrender on the part of the Tide Water 
concern, and an agreement was reached in October, 1883, by 
which the Tide Water Company became for all practical purposes 
a part of the Standard Oil System.* The Standard Oil Company 
and its ally now collected practicaUy all the crude oil produced, 
and independent enterprise was once more eflFectually dis- 

By 1879, as we have seen, the Standard Oil Company had at- 
tained a position of supremacy in the refining industry. In that 
year, as explained in chapter III, the first "trust agreement" 
was entered into, an agreement which was revised and elaborated 
in 1882. Ten years later (in 1892) this agreement was declared 
\/ illegal by the Ohio courts. For several years thereafter a com- 
munity of interest arrangement was relied upon. But this ar- 
1 rangement was likewise attacked in the Ohio courts as not repre- 
senting an honest attempt to comply with the order of the court, 
and hence in 1899 a decision was made to reorganize in New 
[ersey as a holding company. 

Among the twenty principal companies comprising the Stand- 
dard Oil organization was the Standard Oil Company of New 
Jersey, with a capital of $10,000,000. The charter of this com- 
pany was now amended, and power obtained to engage in all 
kinds of mining, manufacturing, and trading, and to hold stocks 
and bonds. On June 14, 1899, the capital stock of the Stand- 
ard Oil Company of New Jersey was increased to $110,000,000 
through the issuance of $100,000,000 of common stock, the ex- 
isting $10,000,000 being changed into preferred stock.^ The New 
Jersey concern proceeded to exchange its stock for the stocks of 
the concerns which had formerly been controlled by the trustees,^ 
but which now, upon the tardy liquidation of the trust certifi- 

* Report on the Petroleum Industry, part I, p. 54. ~^ ~" 
« Ibid. 
' Ibid., p. 84. 

* A list of the companies controlled by the Standard Oil Company of New 
Jersey is in Report on the Petroleum Industry, part I, pp. 85 seq. 


cates, were in the hands of the former holders of the trust 
certificates. Through this process of exchange the Standard Oil 
Company of New Jersey within a short period of time had out- 
standing all told about $97,250,000 of stock; and this was 
practically the amount of "trust certificates*' issued and out- 
standing at the time of the dissolution in 1892.^ The $10,000,000 
erf preferred stock of the Standard Oil Company of New Jersey — 
this preferred stock represented the total capital stock of the 
Standard Oil Company prior to the increase above noted — ^was 
given the same privileges of exchange as applied to the stocks of 
the other nineteen constituent companies, and it was readily 
exchanged for common stock in the Standard Oil Company of 
New Jersey, since under this company's amended charter divi- 
dends on the preferred stock were limited to 6 per cent, whereas it 
was practically certain that the common stock would receive 
much higher dividends. The preferred stock, after this ex- 
change, was canceUed. 

This reorganization, however, was one in form only. The 
Standard Oil Company of New Jersey (a holding company) 
became the owner of the stocks previously held by the 
trustees; the trustees (liquidating) were made directors of the 
holding company; and the holding company itself was controlled 
by the same individuals who had formerly held a controlling 
interest in the old trust certificates.^ The trust had simply hung 
out a new sign. 

The Standard Oil Company of New Jersey was thus princi- 
pally a holding company. But it also refined and marketed oil 
on its own account. It owned the large refineries at Bayonne 
and Constable Hook, New Jersey, and it operated the Standard 
refineries at Baltimore, Maryland, and at Parkersburg, West 
Virginia. The refineries directly operated by the Standard Oil 

* Report on the Petrokum Industry, j)art I, p. 84. There was no watered 
stock issued as the result of the reorganization of iSqq. What water there 
was, if any, resulted from the issuance of the trust certificates in 1882. 

* Mr. Rockefeller himself held 264 per cent of the stock of the Standard 
Oil Company of New Jersey. Report on the Petroleum Industry, part I, 

p. 95. 


Company of New Jersey produced in 1904 approximately one- 
third of all the illuminating oil produced by the Standard 

The history of the Standard Oil Ccwnpany and the forms erf 
organization adopted by it have been briefly outlined. It is now 
proposed to consider in more detail the position attained by the 
Standard Oil Company, and the principal factors in its success. 
The treatment will deal in the main with the period from 1904 to 
1906, the years which served as the basis for the reports of the 
Commissioner of Corporations. 

In 1904 illuminating oil, or kerosene, was the most important 
product derived from crude oil, both in quantity and value. 
According to the United States Census the total production of 
refined oil * in 1904 was 27,135,094 barrels, or 1,356,754,700 gal- 
lons. Of this amount the Standard Oil Company produced at 
plants controUed directly by it, 21,341,179 barrels, or 78.65 per 
cent of the total.^ The other refineries affiliated with it produced 
about 2,143,100 barrels, which, added to the Standard Oil output 
of 21,341,179 barrels, made a total of 23,484,279 barrels, or 
86.55 per cent of the country's output.^ This left 3,650,805 bar- 
rels as the output of the remaining concerns, or 13.45 per cent 
of the total. But not all of this remainder could properly be 
considered as independent. Some of the so-called independent 
refiners were unable to obtain crude oil except from the Standard 
itself. The Standard, of course, allowed them only as much 
crude oil as it chose, and in this way was able to prevent them 
from extending their business, and from becoming really ef- 
fective competitors. It appears that of the total of about 
3,650,000 barrels of refined oil produced by the companies not 
affiliated with the Standard Oil Company, some 1,160,000, or 
nearly one-third, were produced in refineries dependent for 

* In customary usage the term "refined oil" refers to illuminating oil only, 
and it is so used in the Report of the Commissioner of Corporations. 

* Report on the Petroleum Industry, part I, p. 265. 

* Brief for the United States (no. 725), w>l. I, p. 144, places the percentage 
at 87.30, and states that an employee of the Standard Oil Company verified 
the correctness of the computation. 


their crude oil mainly or entirely on the Standard companies.* 
While these 1,160,000 barrels might not properly be treated as 
controlled by the Standard, neither could they be denominated 
really independent, in view of the conditions under which 
these companies secured their crude oil. If we deduct these 
1,160,000 barrels, there would be left as ind^jendfi^t approxi- 
mately 2,500,000 barrels, or only a Uttle over 9 per cent of 
the total production. 

The effectiveness of the competition of the independents 
was even less than these figures would indicate, since their 
total production was distributed among a large number of 
concerns. In 1904 there were some seventy-five independent 
refiners all told.* The total output of these companies was 
less than that of either the Bayonne or the Philadelphia works 
of the Standard Oil Company. Had the t ntil indrprndfint mit 
put be en concentrat ed in a few 1?trgp ^ffinpqg|;^ com petition wi th 
thfr &t&ndard Oil Coitipany w QUJri ^^^"^ ^^n itjV'^h ^'^^^ vigor- 
ous an<Ksu ccessfu l. 

Lhe afor^entioned statistics relate to the production of re- 
fined oil in the United States, not to the consumption within 
the United States. But they also fairly indicate the Standard's 
proportion of the sales in this country, in spite of the fact that 
some ss per cent of the country's output was then exported, be- 
cause the Standard Oil Company's proportion of the export bus- 
iness was only a little greater than its proportion of the domestic 
production. According to the report of the Bureau of Corpora- 
tions the Standard's proportion of domestic sales in 1904 was in 
the neighborhood of 85 per cent.^ 

Next in importance to iUuminating oil among the products 
of crude petroleum were the naphthas (gasoline and benzine) 
and the lubricating oils. But no statistics were available show- 
ing the quantity of these products refined by the Standard 
Oil Company. The Commissioner concluded, however, that 
because of the ph)rsical limitations on varying the proportion 

' Report on the Petroleum Industry, part I, p. 281. 

* Ibid.,pp. 271-273. 

* Ibid., p. 284. 


of the different refined products derived from crude oil, it was 
safe to say that the Standard controlled in 1904 at least four- 
fifths of the country's output of naphtha and lubricating oil.* 

That the Standard Oil Company possessed monopolistic 
power is evident. What were the chief sources of that power? 
The ability of the Standard to maintain a monopolistic position 
was not the result of the exclusive ownership of a limited nat- 
ural resource; the Standard had no monopoly of the produc- 
tion of crude oil, the raw material. Though the company pro- 
duced large quantities of crude oil, it produced but a small 
proportion of its own requirements. The total production of 
crude oil in the United States in 1905 was approximately 135 
million barrels, and of this amount not over one-sixth was the 
product of wells owned by the Standard Oil Company or af- 
filiated concerns.^ Its interest in crude oil production seems 
to have been greatest in the Pennsylvania and Lima oil fields. 
In 1906 Standard Oil interests produced 26 per cent of the 
crude oil output of the Pennsylvania field, and 31 per cent of 
the output of the Lima field.' In other fields, however, such as 
the Mid-Continent, California, Colorado, and Gulf, its produc- 
tion wa3 quite small.^ 

There were at least two reasons why the Standard Oil Company 
did not attempt to monopolize the refining industry by means of 
the ownership of the supply of raw material. In the first place, 
the Standard probably obtained its oil cheaper by buying a 
large part of it than it could have obtained it by producing the 
entire supply itself. The highly speculative character of the oil 
business, like gold mining, probably caused crude oil to be sold 
on the average for less than the cost of production, at least 
during considerable periods of time. The Standard therefore 
allowed others to take the risks of prospecting, and of opening 

* Report of the Commissioner of Corporations, part I, p. 282. In the brief 
for the government it was charged that the Standard with its affiliated 
companies manxifactured in 1904, 82.9 per cent of the naphtha produced in 
the United States. Brief for the United States (no. 725), vol. I, p. 144. 

* Report on the Petroleum Industry, part I, p. 8. 

* Brief for the United States (no. 725), vol. I, p. 139. 

* Report on the Petroleum Industry, part I, pp. 1 18-1 19. 


up new fields, and confined its efforts in the line of crude oil 
production to the better developed areas. Secondly, and prob- 
ably more important, the Standard was able to secure control 
of the crude oil supply without producing it itself. T he own er- 
ship by the Standard of the pipe-line s, the only effective means 
" gfinarfceting most of the oO^ gave it just as complete control of 
the supply of crude oil as if it had held title to the oil fields. 
Because of its control of the pipe-lines, the Standard in many 
districts was almost the sole purchaser of crude oil, and this 
practicaUy enabled it to fix the price. In the Pennsylvania, 
.Lima-Indiana, and Mid-Continent fields — the principal fields 
producing oil suitable for refining — the Standard Oil Company 
daily published the price that it would pay for crude oil, and this 
price was the public market price. Prior to 1895 oil had been 
bought and sold at oil exchanges located in New York, Pitts- 
burg, and Oil City, Pennsylvania. But these exchanges were 
discontinued in 1895 on account of an announcement by the ,^' \ 

Standard that it would no longer purchase oil on the basis of . \i^* 
the prices established on the exchanges; and thereafter the vX 
Standard itself named the price.^ a , 

It has been urged on behalf of the Standard Oil Company 
that its monopoly power was due to the great ability of its 
managers, and the consequent efficiency of its plants and or- 
ganization. That jhe qopipany all through its history has bee n 

^y ffffirj pnt is nu est joned by no one. And yet the Standard 
Ofl Company has had no monopoly of business abi lity; it has 
been ability of the same high order that developed our railroads, 
our mineral resources, our timber lands, and our industries gen- 
erally. The "captain of industry" has been conspicuous in all 
lines of business. The Standj^rd Oil officials may have been 
"smarter" than their Mlnw^^g Mr. W. H. Vanderbilt once 
said, but, as will be pointed out later, it was not their ability 
alone that enabled the Standard to develop and maintain its 

But if the Standard's monopoly power may not be ascribed 
primarily to the efficiency of its managers, may it not be the 
^ Brief for the United States (no. 725), vol. I, p. 165. 


result of the ecoiKiinies of the trust fonn of organization? Did 
the establishment ct a trust make it possible for the Standard to 
produce more cheaply than its competitors, combined thou^ 
some (d them were, and was the Standard able to retain its mo- 
nc^ly by the practice of maintaining such a low level of prices 
the country over that competition was mpossible? This is a 
matter that deserves more detailed analysis than has yet been 
given to it by any governmental investigating body, even includ- 
ing the Bureau of Corporations. Needless to say, it is not 
within the power of the individual investigator to secure the de- 
sired data. However, we are not altogether in the dark iqxm the 
question at issue, since the Bureau did make quite an extended 
investigation into the relative costs of refining at the Standard- 
and at the independent plants. 

Whatever superiority the Standard Oil Company possessed 
over the independents in the refining business must be attributed, 
said the Bureau, chiefly to one of two causes: (i) the possession 
of a considerable number of plants; (2) the large size of its plants. 

(i) The Standard Oil Company with plants scattered all over 
the country was able to reduce transportation charges, i. e., to 
eliminate cross freights. It could supply each section of the 
country from its nearest plant, and thus effect a saving as com- 
pared with the refiner who had to distribute from a single re- 
finery.^ The Standard Oil Company inigod owned or controlled 
the output of over twenty refineries located in twelve states, 
scattered from New York Harbor to San Francisco Bay, and from 
the Great Lakes to the Gulf of Mexico. No independent refiner, 
however, had more than three refineries, and only two or three 
had more than one.^ The Standard refineries, moreover, were as 
a rule much nearer the large consuming centers. 

The possession of a number of refineries doubtless conferred 
an additional advantage through the possibility which thus 
arose of comparing the results at different plants, and of carry- 
ing on experiments in individual plants without involving the 

* From this it follows, of course, that the refiner with a single plant had 
only A limited market. 

• Report on the Transportation of Petroleum, p. 29. 



entire volume of business. There may also have been the pos- 
sibility of reducing the cost of general administration and of 
siq>erintendence. However, the economies directly attributable 
to the possession of numerous refineries, aside from the saving in 
cost of transportation, were, in the opinion of the Commissioner 
f Corporations, by no means great.^ 

(2) The Stapdard also had an advantage over the independ- 
ents because of the large size of its individual plants. In the 
eighteen plants directly controUed by it the Standard produced, 
in 1904, 21,341,000 barrels of illuminating oil, while the 75 or 
more independent plants in the country had an output of only 
* about 3 ,650,000 barrels. The Standard plants at Bayonne and at 
Philadelphia each produced approximately 5,000,000 barrels, or 
about 50 per cent more than all the independent plants put to- 
gether. The largest independent concern in 1904 produced only 
about 200,000 barrels of illuminating oil. After 1904 several 
independent concerns enlarged their refineries, or constructed new 
ones which approximated the average size of the Standard plants, 
yet none of the independent plants could compare in size with 
the largest Standard plants. 

The superiority of the large Standard plants, however, was by 
no means as pronounced, said the Bureau of Corporations, as the 
representatives of the company claimed. This superiority would 
be expected to manifest itself in two different ways — ^first, in a 
lower cost per unit of product; and, second, in better yields, i. e., 
a less amount of waste and larger proportions of the more val- 
uable products. With regard to the first point, the Bureau 
declared that there was no great difference in refining costs as 
between the plants of the independents and the plants of the 
Standard. Data gathered by the Bureau from nine independent 
refineries (the only ones whose costs were closely comparable 
with those of the Standard refineries) showed operating costs of 
refining ranging from 24.91 cents per barrel of crude to 35.53 
cents, and averaging 29.28 cents.^ Data regarding the Standard 
Oil Company's refining costs were collected for the following six 

> Rqxut on the Petroleum Industry, part II, p. 650. 
• Ibid., p. 653. 


plants: Sugar Creek, Missouri, and Neodesha, Kansas (com- 
bined), 15.46 cents per barrel; Chaison, Texas (Security Oil 
Company, an affiliated concern), 27.0 cents; Lima, Ohio, 29.29 
cents; Richmond, California, 32.8 cents; Florence, Colorado 
(United Oil Company, which seUs its whole output to the 
Standard), 33.6 cents.* From an examination of the costs 
at these six plants it appears that, with the exception 
of the Sugar Creek and Neodesha refineries, the operat- 
ing expenses of the Standard plants were approximately 
the same as those of the independents for which data 
were available; and the Sugar Creek and Neodesha plants 
may not properly be compared with these independent plants, 
since they did not elaborate by-products.^ The Lima plant of 
the Standard was found to be most nearly comparable to the 
independent plants whose costs had been secured, since it 
carried the elaboration of by-products to practically the same 
degree of completeness. The operating costs of the Lima plant 
were, in fact, almost exactly the same as the average for the nine 
independent plants — 29.29 cents as compared with 29.28 cents. 
It is possible, said the Bureau, that some of the larger Standard 
refineries had slightly lower costs, but in any event the difference 
between the average operating cost for all the Standard refiner- 
ies and for the more efficient independent refineries did not, at 
the most, exceed one-eighth of a cent per gallon.' 

With respect to the yield of products, satisfactory statistical 
data were not available. It was known that some of the Stand- 
ard plants elaborated their by-products more fully than any 
independent plant, and also that the Standard plants on the 
whole secured more of the high grade by-products. But it is not 
probable, the Commissioner maintained, that there was a very 
great difference in efficiency with respect to yields as between the 
best Standard plants and the best independent plants.^ 

* Report on the Petroleum Industry, pwirt II, pp. 653-654. The Bureau 
did not secure any direct information as to the costs of production at the 
Standard's plant in Whiting. 

' Report on the Petroleum Industry, part II, p. 654. 

* Ibid., p. 655. < Ibid., p. 651. 


Taking into account both the cost of refining per unit and the 
yield, it is probably safe to say, stated the Conunissioner, that 
the advantage of the Standard over the independent plants was 
not more than one^fourth of a cent per gallon in the cost of fin- 
ished products, and at the outside it would not exceed one-half 
of a cent per gallon.^ 

To what 1 ^ tj^ af^Agtntage of the Standard due? Did it 
repre sent the economies of the trust form of organization, or did 
>ult from the fact that t he la rgest plants were owned by the 
trijs t? To put it differently, was the standard's low refining cost 
the result of combination or of large-scale production? Upon 
this point the report of the Bureau returned no conclusive an- 
swer, since the costs at the large Standard plants were not shown. 

It is clear from what has been said that the Standard, in part 
because of the volume of its business, and the consequent greater 
size of its plants, did refine somewhat more cheaply than its 
competitors.^ Yet the Standard would have effected a monopoly 
through low production costs only if it had been willing to charge 
prices generally so low that the independents could not produce 
at a profit. But this was not its policy. The Standard, to 
be sure, did cut prices in certain localities to make it uncom- 
fortable for its competitors, but this is quite different from a 
policy of low prices generally — a policy that would have cut in 
severely on the Standard's profits. And the fact that the 
Standard was able to maintain its control of the industry while 
at the same time charging prices so high that many of the in- 
dependents made ample profits, in spite of the difficulties under 
which they labored, must mean that the Standard resorted to 
other methods of restraining competition. Beyond question, 1 
says the Commissioner of Corix)rations, the dominant position f\ 
of the Standard Oil Company in the refining industry was due I 
to unfair practices — to abuse of the control of pipe-lines, to rail- A 
road discriminations, and to imfair methods of competition 

* RqM>rt on the Petroleum Industry, part II, p. 655. 

• The Standard had a further advantage over its competitors through the 
ownership of pipe-lines, but, as will be shown later, this did not constitute a 
legitimate advantage. 


in the sale of the refined petroleum products.^ These practices 
will therefore be considered in some detail. 

Throughout its entire history the foundation of the Standard 
Oil Company's success has been the element of transportation. 
The advantages in transportation possessed by the Standard 
have been two-fold: those resulting from its ownership of pipe- 
lines for transporting crude oil; and those resulting from rail- 
road discriminations in the transportation of the refined products 
of crude oil. 

Ownership of Pipe-Lines 

Most of the crude oil produced in this country, with the ex- 
ception of that produced in California, Texas, and Louisiana, is 
refined before being consumed.^ It reaches the refineries mainly 
by means of pipe-lines. A net work of small pipes gathers the 
oil from the wells, and except where the refinery is quite near 
to the wells, the oil is conveyed to the refining point by means 
of trunk lines, often of great length. The process by which the 
Standard interests acquired a practical monopoly of the pipe- 
line system has already been described. This monopoly it was 
able to maintain. In 1904 the Standard controlled 88.7 per cent 
of the pipe-line business of the Pennsylvania field, and 93.5 
per cent of that of the Lima-Indiana field.^ There were 
apparently no competing lines whatever in the Illinois field, 
and up to 1906 there was substantially no competition in the 
Mid-Continent field.* 

The methods employed by the Standard to maintain its 
monopoly of the pipe-line business were thoroughly investi- 
gated by the Bureau of Corporations. The conclusions of the 
Bureau were substantially as follows: ^ 

(i) The Standard interfered with the construction of inde- 

^ Report on the Petroleum Industry, part I, pp. 276-277. 

* The oil of these states is not so suitable for refining, and is used laigdy 
for fuel in its natural condition. 

* Brief for the United States (no. 725), vol. I, pp. 140-141. 

* Ibid., pp. 141-142. 

. • Report on the Petroleum Industry, part I, pp. 153-154. 


pendent pipe-lines in various ways. Having once constructed 
its own line, it used its influence to prevent th^ passage of laws 
giving pipe-lines the right of eminent domain."* In the absence 
of such laws, and to some extent even when they existed, it was 
able to hinder or prevent the construction of independent pipe- 
lines by buying up or securing control of lands over which they 
had to pass, and by influencing railroads to refuse pipe-lines the 
right to cross their tracks. (2) When the Standard was unable 
to preyent the construction of independent pipe-lines it sought 
to control them by acquiring their stock. (3) The Standard 
at times induced crude oil producers who were relied upon to 
furnish oil to independent pipe-lines, or refiners who were relied 
upon to take the oil, to refrain from doing so. This policy was 
frequently accompanied by outright purchase of the crude-oil 
prc^rties or refineries. By this means the volume of business 
of the independent lines was restricted, and the cost of pipeage 
prc^rtionally increased. (4) The Standard by the payment of 
premiums for crude oil produced in the territory reached by the 
independent pipe-lines made it difficult for independent pipe 
companies to obtain oil for transportation over their lines. Most 
of the independent pipe companies, like the Standard itself, 
purchased practically all the crude oil which they handled. 
The payment of a premium meant that a higher price was 
offered for the crude of a particular area than was offered for 
crude elsewhere in this same field. By paying a premiimi the 
Standard was able to prevent the independent pipe-lines from 
getting an adequate supply of oil, or else to force them also to 
pay premiums, with a consequent diminution in their profits. 
Since the independent pipe-lines were all comparatively small 
concerns, reaching only a limited area, the Standard by paying 
these premiums in certain localities greatly reduced their 
profits, while itself sustaining comparatively little loss on the 
entire volume of its business. The practice of paying premiums 
on crude oil is similar in principle and effect to the practice of 
selling refined products at a cut price in certain markets (local 
price discrimination). The payment of premiums was, on the 
whole, the most important of the unfair practices of the Stand- 


ard in preventing the development of competition in the pipe- 
line business. 

The practices above enumerated by ^he Commissioner re- 
sulted in legislation dealing with the situation. In 1906 pipe- 
lines were declared by the Hepburn Act to Be common carriers. 
This made them subject to the provisions of the law requiring the 
charging of reasonable and non-discriminatory rates, and the filing 
of these rates with the Interstate Commerce Commission. The 
constitutionality of this law, however, was disputed, and mean- 
while the pipe-line companies controlled by the Standard ren- 
dered the law practically inoperative, according to the Commis- 
sioner of Corix)rations, by their refusal to accept the obligations 
of conunon carriers.^ The companies endeavored in various 
ways to prevent outside shippers from making an effective use 
of the Standard pipe-lines. We quote again substantially from 
the report of the Bureau.^ (i) Some of the Standard pipe-lines 
filed no tariffs with the Conmiission, and refused to transport 
any oil for others. To avoid doing so they sought in some cases 
to confine their business, or at least pretended to confine it, 
within the boundaries of individual states. (2) Though some of 
the Standard's pipe-lines filed their rates with the Commission, 
the rates specified were almost identical with the rates of the 
railroads between these same points. The rates charged, fur- 
thermore, were much in excess of the cost of the service, and 
were thus imreasonable.' (3) The tariffs filed by those Standard 
pipe-lines that did comply with the law in this respect were more 
remarkable for their omissions than for the rates which they 
quoted. For example, no rates were given to New York Harbor, 
either in the state of New York or in the state of New Jersey, 
and no rates to Baltimore, Maryland. These were points to 
which outside shippers would very naturally wish to send 
oil. On the other hand, numerous rates were quoted to places 

* Report on the Petroleum Industry, part I, p. 183. 

* Ibid., pp. 1 83-191. 

•Ibid., pp. 35-36. On the wide margin between pipe-line costs and 
rates, see also the Report of the Federal Trade Commission on Pipe-Line 
Transportation of Petroleum, pp. 18-20. 


where no one would care to deliver oil. (4) Finally, even when 
the Standard pipe-lines did file tariffs indicating an apparent 
willingness to transport oil for others, they established regu- 
lations that virtually prevented shipments. Most of the 
tariffs filed by the Standard required shipment to be made in 
quantities of not less than 75,000 barrels, and in the case of 
same of the lines, 300,000 barrels, minima so high as virtually to 
prevent the use of the pipe-lines by outside shippers. 

While such tactics as these did not indicate a disposition to 
ccwnply with the requirements of the law, the Conmiis- 
sioner pointed out that possibly the action of the Standard 
pipe-line companies did not represent their finally deter- 
mined policy. The act had just been passed, and the Inter- 
state Commerce Conmiission had not yet made any regulations 
with respect to pipe-lines, or decided any cases involving their 
rates. But the report of the Federal Trade Commission on Pipe- 
Line Transportation of Petroleum makes it clear that obstruc- 
tionary tactics were to be the Standard's determined poUcy ;^ that 
the law was not to be obeyed until its constitutionality had been 
decided by the Supreme Court. And this did not come to 
pass until 1914. Several years after the passage of the Hepburn 
Act in 1906, the Interstate Commerce Commission had issued an 
order requiring the Standard and other pipe-line companies to 
file with the Commission schedules of their charges for the 
tran^x>rtation of oil.* The defendants brought suit in the 
CcMnmerce Court to set aside the order, and that court issued a 
preliminary injunction, holding the statute to be unconstitu- 
tional.' But in 1914 in the Pipe-Line Cases the Supreme Court 
fully upheld the constitutionality of the law.* The interstate 
pipe-lines thereupon filed their rates with the Commission, but 
they had succeeded in staying the operation of the law, so far as 
they were concerned, for a period of eight years. 

The excessive pipe-line rates charged the independent refiners 
were likewise charged the Standard refining companies. But 
this clearly was a matter of indifference to the Standard organi- 

' Sec pp. aa-22. • 204 Fed. Rep. 798. 

* 24 I. C. C. Reports i-ii (June 3, 191 2). * 234 U. S. 548. 


zation. It was simply a question of where the profit of the 
organization as a whole was mainly to be made, whether 
in transportation or in refining. To the independent refiner, 
however, a high pipage rate was a vital matter. An unreason- 
able rate reduced corresf)ondingly his total profits, and might 
cause him to do business at a loss. At times the rate on crude 
oil from the Appalachian field to the seaboard was more than 
25 cents per barrel higher than the cost of transportation, 
including in that cost a profit of 10 per cent on the cost of repro- 
ducing the pipe-lines.^ This was over half a cent per gallon, and 
half a cent would yield a profit of about 10 per cent on the invest- 
ment required to carry on the refining business.* It is dear that 
the opportunities for competition in the refining of oil would 
have been much greater had the Standard pipe-lines been com- 
pelled to carry oil for others at a reasonable rate. In fact, not 
only the prosperity, but, according to the Federal Trade Com- 
mission, perhaps even the existence of many small concerns was 
dependent on lower pipe-line rates and reasonable minimum 

The control of the pipe-lines with the refusal to charge reason- 
able rates on the transportation of crude oil gave the Standard a 
further advantage over the independents, in that it was enabled 
to locate its refineries more advantageously than the independ- 
ents. Thus, the Standard refineries were located for the most 
part near the centers of consumption, its two largest refineries 
being on the Atlantic seaboard, and its third largest being at 
Whiting, Indiana (near Chicago). It was the low cost of trans- 
porting crude oil by pipe-line that made it possible for the Stand- 
dard Oil Company to locate its refineries so far from the oil wells. 
' On the other hand, the high rates charged on oil transported 
through the pipe-lines forced the refiners not possessing pipe- 
lines to locate their refineries near the supply of raw material, and 
to distribute their refined products from such points. Thus, 
the main centers of independent oil refining in 1906 were in west- 

* Report on the Petroleum Industry, part I, p. 38. 
» Ibid. 

• Report on Pipe-Line Transportation of Petroleum, p. XXXH. 


em and northwestern Pennsylvania, and northwestern Ohio. 
There were only four independent plants on the Atlantic coast, 
near to the populous cities of the seaboard and to the export 
markets; and none at Whiting, the distributing point for the 
western and southern markets. 

The advantage in locating near the market obviously arose out 
of the fact that the cost of transf)orting crude oil in pipe-lines was 
much less than the cost of transporting the refined product to 
market by rail or water. Whereas the entire cost of transporting 
crude oil by pipe-line from the Appalachian field to the Atlantic 
seaboard did not exceed one-fourth of a cent per gallon, the 
freight rate on refined oil from the independent plants in west- 
em Pennsylvania to New York Harbor was about one cent per 
gallon.^ Naturally the independent refiners preferred to locate 
their plants on the seaboard, rather than near the oil fields, yet 
this was not practicable, since, as has been stated, the Standard 
pipe-lines charged prohibitive rates for the transportation of 
crude oil, the pipeage rates to independent shippers being several 
times the actual cost of transportation to the Standard pipe- 
lines. The independents might still have located near the 
centers of consumption had the rail rates on the transportation 
of crude oil been comparatively low, but this was not the case. 
Generally speaking, the rail rates were as high or even higher 
than the pipe-line rates, high as these were.^ 

It might be asked why the independent refiners did not build 
pipe-lines of their own, if the location of their refineries near the 
markets was prevented by the excessive rates charged by the 
Standard pipe-lines. The explanation is that pipe-line trans- 
portation for long distances is economical only when the volume 
of traffic is large; and the unfair methods of the Standard had 
prevented the independents, with a few notable exceptions, 
from building up a business sufficient to justify the investment. 
The United States Pipe Lme Company did succeed in constmct- 
ing a tmnk pipe-line, but because of the opposition of both the 

* Rqx)rt on the Transportation of Petroleum, p. 62. 

* Report of the Federal Trade Commission on Pipe-Line Transportation 
of Petrolciun, pp. 22-24. 


Standard OU Company and the railroads it took it nine years to 
complete its line to tidewater. An earlier enterprise — ^The Tide 
Water Pipe Company, the first company to lay a pipe-line to the 
seaboard — ^was so harried by the Standard interests that it even- 
tually capitulated. Had the independents been left alone, they 
would undoubtedly have much extended their pipe-line facili- 

It is apparent that if there is to be effective competition in the 
sale of petroleum products, the pipe-lines, which carry the crude 
oil, must be open to all refiners on equal and fair terms, both as to 
rates and facilities. The analogy of the anthracite railroads and 
the commodity clause would suggest the desirability of definitely 
separating the ownership of the pipe-lines and of the refineries. 
Whenever a carrier has a financial interest in reducing the volume 
of traffic offered to it for transportation over its line, it is only 
with great difficulty, if at all, that it can be forced to offer satis- 
factory facilities at reasonable rates to its would-be patrons. The 
Federal Trade Commission, it may be observed, has strongly 
recommended that the ownership of the pipe-lines be segregated 
from the other branches of the petroleum industry.* 

Railroad Discriminations 

Through its ownership of pipe-lines the Standard had an 
advantage over its competitors. In addition, through railroad 
discrimination it was able to get its refined products to market on 
better terms than the independents. 

In the petroleum business the cost of transportation is a vital 
factor. The importance of transportation arises out of the fact 
that the cost of refining, even including in the cost a reasonable 
profit to the refiner, is very low as compared with the freight 
rates on the transportation of refined oil to market. The operat- 
ing expense of refining averaged in 1906 about three-fourths of a 
cent per gallon.^ A net return of one-half a cent per gallon was 
considered an ample pro6t.' It follows, therefore, that one and 

* Report on Price of Gasoline in 1Q15, pp. 17-18. 

* Report on the Petroleum Industry, part II, p. 14. 

* Report on the Transportation of Petroleum, p. 34. 



a half cents per gallon provided abundantly for operating ex- 
penses and profit. But this was less than the freight rate on 
refined oil for transportation for any considerable distance. The 
rates from the oil regions of Pennsylvania and Ohio to the 
markets of the middle west ranged, roughly, from two cents to 
three cents per gallon.^ It is apparent, therefore, that a com- 
paratively sUght difference in rates might enable one refiner to 
sell at a profit while his competitor was losing money. And in 
this industry, as in most all others, it is the relativity of rates, 
rather than the amount of the rates themselves, which most 
concerns the shipper. 

Illustrations of railroad discrimination in favor of the Standard 
Oil Company during the. early years of its history have already 
been given. The present account deals only with the advantages 
enjoyed by the Standard at the time when the Bureau of Cor- 
porations published its report on the Transportation of Petro- 
leum. To quote from this report: 

"The general result of the investigation [into transportation con- 
ditions for the preceding three or four years] has been to disclose 
the existence of numerous and flagrant discriminations by the 
railroads in behalf of the Standard Oil Company and its affiliated 
corporations. With comparatively few exceptions, mainly of 
other large concerns in CaUfomia, tie Standard has been the sole 
beneficiary of such discriminations. In almost every section of 
the country that company has been found to enjoy some unfair 
advantages over its competitors, and some of these discrimina- 
tions affect enormous areas."* 

The discriminations enjoyed by the Standard in the trans- 
portation of oil were classed in the report of the Bureau under 
four heads: (i) secret and semi-secret rates; (2) discriminations 
in the open arrangement of rates; (3) discriminations in classi- 
fication and rules of shipment; (4) discriminations in the treat- 
ment of private tank cars. Data on the first two only will be 
here presented. 

(i) Two leading instances of secret and semi-secret rates 

* Report on the Transportation of Petroleum, p. 34. 
•Ibid., p. I. 


may be cited.^ The first deals with rates from Whiting, Indiana, 
into the South.^ The pubUshed tariflF from Whiting into the 
South was made up of a rate of eleven cents per hundred pounds 
to the Ohio river plus rates of varying amounts from the 
Ohio river south. This arrangement had long been in force, 
and was known to all shippers. The Standard Oil Company, 
however, shipped its oil into the South on an especially low 
rate applying to shipments between Dolton, Illinois, and Grand 
Junction, Tennessee. This rate would have been open to all 
shippers had they known of its existence; but they did not, since 
Dolton was an unimportant junction point near Chicago, and 
the ordinary shipper would never have thought of looking up 
the rate from Dolton. The Standard Oil Company knew of it, 
however, since it was made for its benefit. The secrecy of the 
Dolton rate is proven by the fact that the Chicago and Eastern 
Illinois, the road making the rate, reported to the Bureau rates 
from Whiting to the, South much higher than those which were 
accorded to the Standard Oil Company on shipments by way of 
Grand Junction. By means of this secret combination of rates 
via Grand Junction the Standard shipped oil into a large part 
of the South at an average of one-fourth less than the published 
rate from Whiting, and approximately one-third less than the 
rates from competitive refining points in Ohio and Western 
Pennsylvania no farther distant. These discriminatory rates had 
hardly been uncovered by the Bureau before they were can- 
celled by the railroad. But meanwhile the business of the in- 
dependents had been much damaged. 

To cite a second instance,^ the only published rate on oil be- 
tween Whiting and East St. Louis, Illinois, was the regular class 
rate of i8 cents per loo pounds. But the Standard, practically 
from the opening of its Whiting refinery in 1890, had been 
charged only 6 cents per 100 pounds. The shipments of the 
Standard Oil Company were very large, practically its entire 

* For other instances, see Report on the Transportation of Petroleum, 
pp. 8 seq. 

• Described in Report on the Transportation of Petroleum, pp. 6-7, 12. 
' Ibid., pp. 12-14. 


southwest business being handled from Whiting through East 
St. Louis. The independent refiners in northern Ohio and 
western Pennsylvania were charged from 17 to 24^ cents on 
shipments to East St. Louis, or from 11 to i8J^ cents per 100 
pounds more than the Standard rate to St. Louis from Whiting. 
Had the adjustment of rates on oil been on the same basis as on 
most other commodities, Whiting would have enjoyed lower 
rates to St. Louis than would centers of independent refining, 
but the difference in favor of Whiting would not have been more 
than five to ten cents, instead of eleven to eighteen and a half 
cents. With the aid of this six cent special rate, combined with 
other minor discriminations in the rates beyond East St. Louis, 
the Standard Oil Company was enabled to establish a well-nigh 
complete monopoly throughout the southwest. As soon as this 
secret six cent rate was uncovered by the Bureau — the railroad 
officials admitted it was secret — it was cancelled, and a rate of 
ID cents per 100 pounds was substituted therefor. Yet even this 
ID cent rate was unreasonably favorable to the Standard plant 
at Whiting as compared with rates from competing refining 
points to East St. Louis. 

The secret rates enjoyed by the Standard Oil Company 
naturally helped it to maintain its monopolistic position. With 
the idd of its favorable freight rates, the Standard was able to 
sell oil in competitive areas at prices which were profitable to it, 
but which left no profit to its competitors. Upon the elimination 
of the competitors, the Standard advanced its prices to several 
cents above the cost of refining, and thus made enormous 

(2) Discriminations in the open arrangement of rates. Almost 
as important as the secret discriminations in rates were the open 
discriminations. To quote from the report of the Bureau: 

"Almost everywhere the rates from the shipping points used 
exclusively, or almost exclusively, by the Standard are rela- 
tively lower than the rates from the shipping points of its com- 
petitors. Rates have been made low to let the Standard into 
markets, or they have been made high to keep its competitors 
out of maricets. Trifling differences in distances are made an 


excuse for large differences in rates favorable to the Standard Oil 
Company, while large differences in distances are ignored where 
they are against the Standard. Sometimes connecting roads 
prorate on oil — that is, make through rates which are lower than 
the combination of local rates; sometimes they refuse to prorate; 
but in either case the result of their policy is to favor the Stand- 
ard Oil Company. Different methods are used in different 
places and imder different conditions, but the net result is that 
from Maine to California the general arrangement of open rates 
on petroleum oil is such as to give the Standard an unreasonable 
advantage over its competitors. 

The conclusion is unavoidable that the Standard Oil Com- 
pany has had an important voice in the construction of such 

As illustrating the favoritism shown the Standard Oil Com- 
pany we refer again to the rates out of Whiting, Indiana.^ The 
Whiting refinery was the Standard's most important refinery 
from the standpoint of distribution in this country; it produced 
one-third of all the refined oil sold by the Standard in the United 
States. Into practically all of the territory served by it, the open 
rates from Whiting were lower than the geographical location of 
the plant justified. This advantage was increased through the 
refusal of the railroads to prorate on oil. Prior to the opening of 
the Whiting refinery the western railroads had prorated on ship- 
ments of oil from the eastern refining points to the Middle and Far 
West, as they had on practically all other commodities. But 
shortly before 1890 the railroads discontinued this practice, so 
far as oil shipments were concerned. This meant that the east- 
em refiners, in order to get into western markets, had to pay 
the local rate to Chicago plus the rate from Chicago to destina- 
tion. The disadvantage to which they were put in competi- 
tion with the Standard plant at Whiting was thus measured by 
the local rate to Chicago, which amounted to from twelve to 
nineteen and a half cents per hundred pounds. Had prorating 
arrangements been maintained, this disadvantage would have 
been much less. 

Notwithstanding the subsequent cancellation of the secret 

' Report on the Tran^wrtation of Petroleum, pp. 20-21. 

* Described in Report on the Transportation of Petroleum, pp. 21-22. 


rates to Grand Junction and other points, Whiting was still 
favored over independent refining centers in the open rates into 
the entire south. From Whiting into the south the rate on oil was 
three and a half cents less than from Toledo, four cents less than 
from Cleveland, and seven and a half cents less than from Pitts- 
burg, although on other commodities the rates from all these 
cities were practically the same as from Whiting. The success of 
this policy of discrimination between refining points was largely 
dependent, of course, upon the fact that a large proportion of the 
Standard's traffic originated at places where the independent 
refiners had no plants. The Standard supplied the greater part 
of the oil which it distributed in the United States from its great 
refineries at the seaboard and near Whiting, and there were few 
competitors at the seaboard and none at Whiting. 

Unfair Methods of Competition in the Sale of the Refined 

Petroleum Products 

The most important of the unfair practices of the Standard, so 
far as they relate to selling, has been local price cutting, or 
local price discrimination as it is generally called. The prices 
charged by the Standard Oil Company for petroleum products 
have varied greatly in different towns according to the amoimt 
of competition. This has been true of all petroleum products, 
but has been most glaring with respect to illuminating oil and 
gasoline. After making allowance for freight charges, which 
generally form a considerable part of gross prices, marked dif- 
ferences in prices appeared, not only between different states 
or sections of the coimtry, but also between the different towns 
of each state. These differences in prices could sometimes be 
explained, in part at least, by differences in production and 
marketing costs, yet in many cases they reflected solely the 
intensity of competition encountered. 

The fact of varying prices in different sections, indicating 
local price discrimination, is shown by the following table, giv- 
ing the average price (less freight charges) paid by retailers for 
illuminating oil purchased from the Standard.^ 

^ Report on the Petroleum Industry, part n, p. 3r. 



AvBSAGE Price of Illuminating Oil,^ Less Freight, Dbceubbr, 1904, 

BY States 

North Atlantic Division: per gallon 

Maine 10.4 

New Hampshire 10.3 

Vermont 9.0 

Massachusetts 9.9 

Rhode Island 9.6 

Connecticut 8.9 

New York 10. o 

New Jersey 9.8 

Pennsylvania 8.7 

South Atlantic Division: 

Delaware 7.7 

Maryland & D. C 9.2 

Virginia 9.7 

West Virginia 9.0 

North Carolina 10.3 

South Carolina 10.8 

Georgia 11.6 

Florida 12.8 

North Central Division: 

Ohio 8.5 

Indiana 9.3 

Illinois 9.1 

Michigan 9.0 

Wisconsin 9.2 

Minnesota 9.6 

Iowa ... 10.2 

Missouri 10.9 

North Dakota 11. i 

North Central Division Cents 

(cont.) : per gallon 

South Dakota 12.9 

Nebraska 10.5 

Kansas 11. 4 

South Central Division: 

Kentucky 9.4 

Tennessee 11. 6 

Alabama 11. 6 

Misdssippi 9.8 

Louisiana 9.5 

Arkansas 13.9 

Indian Territory 12.5 

Oklahoma 14.0 

Texas 11. 6 

Western Division: 

Montana 15.6 

Idaho 15.6 

Wyoming 15 . 6 

Colorado 16. 2 

New Mexico 13 . 2 

Arizona 10 . 7 

Utah 14.8 

Nevada 16.4 

Washington 15.7 

Oregon 15.3 

Cahfomia 11. i 

Northern California 12.4 

Southern California 7.2 

From this table it appears that the average price of illumin- 
ating oil was lowest in Delaware — 7.7 cents per gallon — and 
highest in Colorado — 16.2 cents per gallon — ^not counting Nev- 
ada, the quotation for which represented only one town. The 
average price in Colorado was thus more than twice the average 

1 There are several grades of illuminating oil, but most of the oil sold in 
this country is the second grade of water-white oil, and the prices of illum- 
inating oil quoted in the Report of the Bureau of Corporations are for the 
most part the prices of this grade of oil. 


price in Delaware. According to the Report of the Bureau of 
Corporations not more than three and one-half cents of the dif- 
ference in price in these two states could be explained by dif- 
ferences in producing and marketing costs; and of course none 
of the difference in price could be explained by differences in 
freight rates, since the price in each case was that paid by the 
retaUer, less freight charges from the Standard refinery. 

Again, the prices (freight rates deducted) within the Missis- 
sippi basin from the Northern border to the Gulf of Mexico 
ranged from 8.5 cents in Ohio, where several independent plants 
were located, to 13.9 cents in parts of Arkansas. This territory 
was largely supplied with oil by the Standard refineries at Whit- 
ing, Indiana, and Cleveland and Lima, Ohio; and these refineries 
used the same kind of crude oil, and had practically the same 
production costs. In fact, most of this area was served by the 
Whiting refinery alone. 

A very striking instance of sectional price variation is found 
on the Pacific coast. The Standard refined oil at its great re- 
finery near San Francisco. The average price of this oil, the 
freight rate deducted, in December, 1904, was 7.2 cents per 
gallon in southern California, and 12.4 cents per gallon in 
northern California. The obvious explanation is that there were 
independent refineries in southern California. In Oregon, which 
drew its supplies from the same source, the price (freight rate 
deducted) averaged 15.3 cents per gallon, and in Washington, 
15.7 cents. The price in the northern Pacific states was thus 
more than twice as high as in southern California for exactly 
the same oil. 

The figures for gasoline show practically the same amount of 
price variation between the several states and sections of the 
country as has been shown to exist in the case of illuminating oil. 

Equally significant are the differences in prices charged for 
iUuminating oil and gasoline in towns within the same state. 
This subject is fully discussed in the report of the Bureau of 
Corporations, and the details need not be reproduced here.^ 

^Sce Report on the Petroleum Industry, part II, pp. 35-^9, 48o-507» 


Summarizing the data, in thirty-one of the states and territories, 
the range between the highest and lowest price of illuminating 
oil, freight deducted, was at least 3 cents; in ten states the range 
was at least 5 cents; and in one state — New Mexico — the highest 
price charged within the state exceeded by 13.2 cents per gallon 
the lowest price charged. In most cases, according to the report, 
only a small part of these differences in price within a single 
state was attributable to differences in marketing cost. 

With respect to a number of the towns in which the price of 
illimiinating oil was relatively low, the Bureau made inquiry 
into the cause thereof, and found that in the majority of cases 
these low prices were due to the existence of active competition. 
To quote from the report: 

"The evidence is, in fact, absolutely conclusive that the Stand- 
ard Oil Company charges altogether excessive prices where 
it meets no competition, and particularly where there is little 
likelihood of competitors entering the field, and that, on the 
other hand, where competition is active, it frequently cuts prices 
to a point which leaves even the Standard little or no profit, and 
which more often leaves no profit to the competitor, whose 
costs are ordinarily somewhat higher." » 

The significance of these differences in prices appears when it 
is realized that a reduction of about 7 mills per gallon in the 
price of illuminating oil would have converted a profit of 10 per 
cent on the investment in refining and marketing facilities into 
an actual loss.^ The differences in price between competitive 
and noncompetitive towns and areas, even after making Uberal 
allowance for possible differences in production and marketing 
costs, often amounted, as we have seen, to several cents i>er gal- 
lon. How disastrously the practice of local price discrimination 
affected the independent refiners must, therefore, be quite 

In carrying out its practice of local price discrimination the 
Standard Oil Company made frequent use of bogus independent 
concerns, that is, concerns paraded as independent, yet in 

^ Report on the Petroleum Industry, part II, p. 39. 
* Ibid., p. 29. 


reality controlled by the Standard. By means of these concerns 
the Standard was able to cut prices to the customers of the in- 
dq)endent refiner, without incurring the additional loss involved 
in a reduction of prices to the entire trade of the territory affected. 
By this device, also, anti-trust sentiment, which often took the 
form of a refusal to buy from a trust, was overcome. The 
government in its Brief presented a list of 63 concerns which had 
been operated by the Standard as bogus independents.^ The 
most extensive of these companies was the Republic Oil Com- 
pany (a reorganization of the firm of Scofield, Shurmer and 
Teagle). The chief fimction of this company, according to the 
Supreme Court of Missouri, was to follow up the business of the 
independent refiners, and under the guise of being an independ- 
ent company, and by means of rebates, fraud, and deception, to 
wage a most vigorous competition against them in all districts 
where they competed with the Standard companies. And when, 
to quote the Court, "the Republic Oil Company had sufficiently 
chastised the independents, and thereby curbed their desire 
and ambition to increase the volume, of their business, by 
the reduction of price of oils or otherwise, it would then practi- 
cally retire from the field of operation and eagerly await the next 
combat with the independents, if, perchance, any one of them 
was so timorous as to challenge the monopoly of those two com- 
panies [the Standard Oil Company of Indiana and the Waters 
Pierce Oil Con^)any] by seeking any portion of their trade." ^ 
The Standard was able to conduct this policy of local price 
cutting with effectiveness because of the intimate knowledge it 
had of its competitors' business dealings. This knowledge was 
obtained by the Standard Oil Company and its various subsid- 
iary marketing companies through a highly developed s)rstem 
of e^ionage over the affairs of its competitors. The desired in- 
formation as to the receipts and shipments of oil by competitors 
was obtained in part through the observations of its own staff, y 
and in part by bribing railroad employees.' . 

* Brief for the United States (no. 725), vol. II, pp. 520-523. 

'218 Missouri Reports 445. 

» Report on the Petroleum Industry, part I, p. 302; and part II, p. 58. 


The practice of local price discrimination — a f onn of predatory 
competition — was greatly facilitated by the Standard's method 
of marketing. The Standard had largely eliminated the jobbers, 
delivering its oil directly to the retailer by means of its own tank 
cars, tank stations, and tank wagons. This bulk S3rstem of 
distribution has great advantages over barrel or package distri- 
bution. In the first place it costs less to ship oil in bulk than in 
barrels or other packages, and there is often a saving in the 
local deUvery of oil from the railway to the retailer. And per- 
haps more important is the fact that barreled oil is likely to leak, 
to cause dirt, bad odors, and fire, and therefore the retail dealer 
will ordinarily prefer to buy oil from the tank wagon even at a 
somewhat higher price. Dealing directly/ with the retailer, and 
sometimes even directly with the consumer, the Standard could 
obviously adjust its prices in the various markets in such a way 
as to stifle threatened competition, as it could not had its 
product been handled largely through jobbers. 

This in itself excellent, because economical, bulk system of 
distribution further contributed to the maintenance of the Stand- 
ard's monopoly, in that one tank wagon can serve a given town 
(if a small one), or a section thereof (if a large one), as well as two 
can, and at a much less expense per unit of product. This is be- 
cause of the elimination of a dupUcate service. The result is that 
when once a concern has the facilities for supplying a given town, 
other concerns naturally hesitate to invade its territory. They 
well realize that severe competition may result, and in this 
competition the concern with an established clientele will have 
the advantage. However, if the first concern to enter the field 
merely does a local business it will notLejahle to prevent compet- 
itors from gaining a foothold, unless indeed it should be willing 
to cut prices on all its sales; and this would be quite as costly to 
it as to its competitors. But if one of the competitors does a 
nation-wide business, the case is quite different. Thus, the 
Standard Oil Company, doing business throughout the whole 
country, could cut prices in the particular localities where there 
was competition, and could meet the losses thus incurred out of 
the profits gathered in elsewhere. A concern doing business in a 


limited territory must therefore generally succumb in a test of 
strength with the Standard; and such has been the experience of 
competition in this industry. 

The Standard was thus able to ward off competition in the 
sale of the greater part of its product. However tempting the 
prices, independents hesitated to enter Standard markets. They 
could compete successfully only if able to establish tank sta- 
tions and tank wagon delivery on a large enough scale to reduce 
the cost per unit of product to a reasonable figure; and they had 
learned by bitter experience that if they made the venture the 
Standard was likely to cut prices below the cost of production 
and delivery. They realized that the Standard could afford this 
interminably, if the price cutting was sujficiently localized, and 
that they could not. It is obvious that only a concern which had 
strong, financial backing, and which sold oil in most of the leading 
mai^ts of the country, could save itself frdm the disastrous 
effects of the practice of price discrimination, and compel the 
Standard, if that company should determine to put prices below 
cost, to accept losses as great as its own. And no concern had 
been able during the period down to the dissolution of the Stand- 
ard Oil Company in 191 1 to develop a business of such a size. 
Hie Standard had been able to keep competition localized and 
scattered, and thus subject to its control. The wonder is, indeed, 
that competition was not entirely destroyed, unless perchance 
this was not desired by the Standard from a fear of drastic 
governmental action. 

We have noted the monopolistic position of the Standard Oil 
Ccxnpyany, and have seen by what means it achieved and main- 
tained this position. How has the consumer fared at the hands 4 
of this organization? What has been the course of prices? 

The claim has been made that reviewing the history of the oil , 
industry as a whole, the Standard has reduced prices, and thus 
has benefited the consumer; that because of its remarkable 
efficiency and the concentration of the business in the hands of a 
trust the Standard has charged prices lower than would have 
prevailed under a competitive regime. 

Satisfactory data showing the course of prices of petroleum 


products in the United States could not be obtained except for 
comparatively recent years. This was because the Standard for 
many years had sold its oU for the most part directly to retail- 
ers, and it was impossible to obtain from retail dealers, except 
during recent years, sufficient returns to show the true price 
movement. However, an idea of the general movement of 
illuminating oil prices in this country can be gained by a study of 
export prices, though these export prices must be used with 
caution. The table below shows the movement of export prices 
from 1866-1905 . 

Average Price of Pennsylvania Crude at Wells and Average Price 
OF Export Illuminating Oil in Barrels at New York, with 
Margin between Them, 1866-1905 * 

(Cents per gaUon) 




Export oil 
in barrels 

























9 15 


23 -75 

15 03 



* '^*' / * 





**'»*'• * 



13 OS 









**'» ••• 


*-*^ 1 


*'^/*T * 



*"/'' * 




M.%J l\f ............... 




* Report on the Petroleum Industry, part II, p. 49. The prices from 
1866-1878 have been reduced to a gold basis. The export prices are for oil in 
barrels, and though there has been some fluctuation in the price of barrels 
independent of that of oil, nevertheless the figures show approximately the 
price of oil itself. 



Average Price of Pemnsylvanu Crude at Wells— Con(tnt4«i 

(Cents per gaUon) 










2. II 




3 10 




Expert oil 
in barrels 

7. II 


















From an examination of this table it appears that the margin 
between crude and refined oil declined almost steadily from 23.75 
cents per gallon in 1866 to 11.96 cents in 1873. Prior to 1874 the 
oil industry was a highly competitive one, and obviously no one 
concern could claim the credit for the reduction in the margin. 
The decline in the margin between 1866 and 1873, it should be 
noted, exceeded the total decline since 1873. This great de- 
cline in the margin under a competitive regime — a decline 
due largely to a reduction in the cost of production — ^would 
appear to foreshadow 'a still further reduction in costs and 
in the margin, trust or no trust, though not in all probability 
at so rapid a rate as during the earlier period. Again, it 


should be noted that most of the declme in the margin which 
took place after 1873 had come by 1879. By this time the 
Standard had obtained its monopolistic control of the in- 
dustry. The margin had been 11.96 cents in 1873; in 1879 it 
was 6.05 cents. This reduction in the margin from 1874-1879 
was the result in large measure of a decline in transportation 
costs. The rate on illuminating oil from the Pennsylvania fields 
to New York, which had been 4 cents per gallon in 1874, fell in 
1879, when rates were being slashed, as low as i cent per gallon.^ 
The building of pipe-lines to the seaboard likewise reduced the 
cost of transportation, yet, as has been noted above, the Stand- 
ard did not originate trunk pipe-lines; in fact, it first learned 
through the successful experiment of the Tide Water Pipe Com- 
pany that this means of transportation was feasible. The con- 
clusion of the Bureau with respect to the history of prices to 1879 
is that the remarkable decline in the margin between crude oU 
and refined oil was chiefly, if not wholly, due to natural or exter- 
nal causes, quite independent of any special influence of the 
Standard Oil Company.^ The Standard, in its opinion, could 
claim little, if any, credit for the reduction. 

The reduction in the margin since 1879 has been noteworthy, 
yet it has been by no means as great as prior to 1879. In 1879 
the margin was 6.05 cents per gallon; in 1905 it was 3.90 cents, 
though the average for the last five years shown in the table was 
as high as 4.46 cents. It should be clear that the Standard was 
not responsible for all of this limited reduction in the margin. 
Progress in the industry was only to be expected, combination 
or no combination. Furthermore, the export prices during the 
period under consideration were not an accurate measure of the 
domestic prices; domestic prices rose much more rapidly than 
export prices. The average margin between the quoted price of 
water-white oil in barrels to jobbers at New York, and the price 
of Pennsylvania crude in 1882 (the first available year), was 9.2 
cents per gallon, while in 1903 it was as high as 10. i cents per gal- 
lon; in 1904 it was 9.8 cents; and in 1905'it was 9.3 cents.* This 

* Report on the Petroleum Industry, part II, p. 50. * IWd. 

• Ibid., p. 51. 


indicates an actual advance in the domestic margin since 1882, 
but the value of the barrels had increased also, so that an exact 
comparison between the two periods can not be made. 

Such slight reduction as has taken place in the margin since 
the early eighties has been counterbalanced, moreover, by an 
increase in the quantity and value of the by-products obtained. 
That is to say, because of the increase in the value of the by- 
products the margin should have declined even more than it did. 
While the Standard has imdoubtedly eflPected greater improve- 
ments in the utilization of by-products than have its competi- 
tors, to attribute all the improvements to the Standard is, ac- 
cording to the Commissioner, wholly inconsistent with the facts 
and out of accord with the history of improvements in indus- 
tries in which competition has been active.^ It is certain, says 
the CcMnmissioner, that imder free competition, there would 
have been a suflScient increase in the value of by-products to 
permit a greater reduction of the margin between crude and 
illimiinating oil than the Standard made. To quote from the re- 
port of the Bureau of Corporations, " the Standard has consis- 
tently used its power to raise the price of oil during the last ten 
years, not only absolutely but also relatively to the cost of crude 

From this brief analysis of prices, it would appear that the 
Standard Oil Company has showed as httle consideration for the 
consimier as for its competitors. This conclusion is reenforced 
by an examination of the profits obtained by the Standard or- 

The projSts of the Standard Oil Company have been enonnous, 
both in amount and in proportion to the investment of the com- 
pany. This becomes apparent upon an examination of the 
table on page 88. 

* Report on the Petroleum Industry, part II, p. 51. 
«Ibid., p. 



Dividends and Profits of the Standard Oil Trust (i 882-1 899) and 
OF THE Standard Oil Company (1899-1906) * 




















Per cent 


or capital 






of net 

of net 


at end of 



Rate of 









mean net 




t 3,695 





















II. 8 



















13 3 


10,620 ■ 






















15. 4 






II .9 






II. 6 






' 17.3 



31 00 


















33 00 














































* Brief for the United States (no. 725), vol. I, p. 6, and vol. II, pp. 8-9; 
and Report on the Petroleum Industry, part II, pp. 39-40. 

* Also stock dividend of 20 per cent, amounting to $15,028,200. 

* There are no data by which to show the earnings of these three years 
sq)arately; the figures here given show, with substantial accuracy, the 
average for the three years^ 1897-1899. Brief for the United States (no. 
725), vol. II, p. 8. 


The Standard Oil Company thus paid out in dividends during 
1882 to 1906 the sum of $548,436^6, an average of 24 per 
cent per year. For the ten years ending in 1906, the dividends 
ranged from 30 per cent to 48 per cent, and averaged 39.7 per 
cent. Furthermore, a large part of the profits was not distrib- 
uted to stockholders, but was put back into the business. The 
total net earnings from 188 2-1906 amounted to $S^SyyS^,yS^f 
exceeding the dividends by $290,347,337. During the ten years 
ending in 1906, the ratio of net earnings to capital ranged from 
48.8 per cent to 84.5 per cent, the average for the ten year period 
being over 61 per cent. 

The rate of dividends and of net earnings becomes even 
larger, moreover, if applied, not to the^tpital stock, but to the 
actual investment in the business, excHRlve of the reinvestment 
of surplus earnings. This investment, \letermined by adding to 
the appraised value of the properties in 1882 ($55,710,698) the 
simis invested since 1882, amounted in 1906 to $69,024480.^ Of 
course, the value of the property held by the Standard in 1906 
much exceeded this figure, but this excess value came from the 
building up of the property through the reinvestment of the 
surplus earnings. Tested by the investment basis, the Standard 
Oil C<»npany, with a capitalization in 1906 of $98,338,382, was 
overcapitalized by about $30,000,000; that is, its stock was 
watered to that extent 

The objection may be made that the rate of profit on the 

actual investment is not a fair basis of analysis; that a fairer 

basis is the ratio of dividends and net earnings to the value of the 

company's property, i. e., to its net assets. There has, therefore, 

been included in the table a column showing the per cent of the 

net earnings to the mean net assets. Naturally these figures are 

more favorable to the Standard, yet even these figures show 

how profitable the prices charged by the Standard have been. 

The net earnings of the Standard for the ten years ending in 

1906 averaged over 25 per cent on the company's net assets. 

It k not necessary to discuss the argument that prices are 

reasonable when they return only a fair profit on the value of the 

* Brief for the United States (no. 725), vol. n, pp. 4-5. 


property, even including in that value the property which was 
acquired out of surplus earnings. It is not necessary because 
viewed from any standpoint it is manifest that the Bureau of 
Corporations spoke truly when it said that "the domestic 
consumer has been compelled to pay an exorbitant tribute to 
the oil monopoly. '* ^ 

It is apparent that the profits of the Standard OD Company 
have been enormous. For the ten years ending in 1906 these 
profits averaged almost $60,000,000 i>er year, while the divi- 
dends averaged nearly $40,000,000 per year. The $20,000,000 
of imdivided profits were ample to provide for any extension 
of plant. Much of the $40,000,000 in dividends therefore 
went into other industries — naturally into those allied with the 
oil industry. Inasmuch as all industries depend on transporta- 
tion and as the railroads are large buyers of oil products, inti- 
mate aflSUations with the railroad companies were well worth 
cultivating. We find, therefore, that the Standard Oil capi- 
talists became large shareholders in railroad companies. We 
find also that the Standard Oil interests went into the gas and the 
electric lighting businesses. The Consolidated Gas Company 
of New York City, for example, was once, if not still, a Standard 
Oil affair. We find these same interests in the steel business, 
notably as large stockholders in the United States Steel Cor- 
poration. We find them interested in copper, the Amalga- 
mated Copper Company being a notable example. We find them 
in the glucose business, particularly in the Com Products Re- 
fining Company. We find that they have even invaded the 
banking field. In this field they could probably say, with 
iEneas, quorum pars magna fuiy a great part of which I — not 
was — ^but am. They could even, with Pistol, exclaim 

Why, then the world's mine oyster, 
Which I with sword will open. 

Also in other realms is their influence felt — in the educational 
world, in religious, humanitarian, and other activities — with 
the Congress of the United States of America unwilling to 

* Reoort on the Petroleum Industry, part II, p. 42. 


give a charter to a $ioo,cxx5,cxx5 of this money, to be devoted 
in perp)etuity to the good of mankind. 

Truly, there are various grave and far-reaching problems 
connected with the question as to whether a monopoly in oil is to 
be permitted to continue as being on the whole a blessing to 
mankind, whether a few cents per gallon added to the price of the 
oil that lights the humbler worker's home or to the price of the 
gasoline that drives Ford and Packard and business truck is 
or is not to be hereafter the stable foundation for world-wide 
business activities and for humanitarian succors as well. 



The early history of the sugar trust, touched on in chapter III, 
may be briefly reviewed. The Sugar Refineries Company — a 
trustee device — ^had been organized in 1887. In 1890 this ar- 
rangement was declared illegal by the New York courts, and 
as a result a reorganization was determined upon. In January, 
1891, the American Sugar Refining Company was chartered in the 
state of New Jersey, — then a place of refuge for combinations 
and trusts. The new company had an authorized capitalization 
of $50,000,000, half preferred stock and half common.* The 
American Sugar Refining Company exchanged its capital stock 
for the trust certificates of the Sugar Refineries Company, and 
thus obtained control over the various corporations previously 
controlled by the trustees. The American Sugar Refining Com- 
pany next caused the several corporations, seventeen in num- 
ber, to convey to it their entire property, real and personal; and 

^On the American Sugar Refining Company see: Original petition in 
United States v. American Sugar Refining Company et al.; Hearings before 
the Special Committee of the House on the Investigation of the American 
Sugar Refining Company, 1911-1912; House Report no. 31 12, 50th Cong., 
I St Sess., 1887-1888; Report of Conmiittee on General Laws relative to 
"Trusts" and "Sugar Trusts," transmitted to the New York Legislature, 
April 30, 1 891; Report of Joint Committee of the Senate and Assembly 
appointed to investigate trusts, transmitted to the New York State Legis- 
lature, March 9, 1897 (Lexow Report); Industrial Commission, vol. I, pp. 
43-166, 801-812; 121 New York Reports 582-626; 156 U. S. 1-46; Report of 
the Federal Trade Commission on the Beet Sugar Industry in the United 
States, May 24, 191 7; Annual Reports of the Attorney General of the United 
States, 1909 ff.; Willett and Gray's Weekly Statistical Sugar Trade Journal; 
Taussig, Some Aspects of the Tariff Question, Part II (Sugar); Vogt, The 
Sugar Refining Industry in the United States. 

* Original Petition in United States ». American Sugar Refining Company, 
p. 47. Referred to hereafter as Original Petition. 



thereupon dissolved them. Upon the completion of this series of 
transactions, the American Sugar Refining Company became a 
property owning trust, as distinct from a holding company trust. 

The American Sugar Refining Company operated only four 
refineries, — the Standard Sugar refinery at Boston, the Matth- 
lessen and Weichers refinery at Jersey City, the Havemeyers and 
Elder refinery at Brookl)ai, and the Louisiana Sugar refinery at 
New Orleans. These four refineries among them had a daily 
melting capacity of about 70 per cent of that of the whole 
country.^ There were only six other cane sugar refineries in the 
country, and one of these — the Havemeyers and Elder plant in 
San Francisco — ^was for all practical purposes a part of the trust. 
The owners of the San Francisco plant had gone into the " trust" 
in 1888, the year after its organization, but because of the 
opposition of the state of California, the plant had been trans- 
ferred to Messrs. H. O. Havemeyer, T. A. Havemeyer, and C. H. 
Senff, members of the board of trustees of the Sugar Refineries 
Company. These three men had thenceforth carried on the 
business imder the name of Havemeyers and Elder, but always in 
cooperation with the Sugar Refineries Company, and its suc- 
cessor, the American Sugar Refining Company. Including the 
output of this San Francisco refinery, as is only proper, the 
American Sugar Refining Company controlled at its organiza- 
tion about 75 per cent of the country's melting capacity.* 

The only cane sugar refining companies outside of the trust in 
January, 1891, were the California Sugar Refinery at San Fran- 
cisco; the Franklin Sugar Refining Company, the E. C. Knight 
Company, and the Delaware Sugar House, all located at Phila- 
delphia; and the Nash, Spaulding and Company at Boston (later 
known as the Revere Sugar Refining Company). During the 
course of the year 1891 the Spreckels Sugar Refining Company 
began the operation of a large new refinery at Philadelphia; and 
the Baltimore Sugar Refining Company had under construction 
a refinery in Baltimore. The sugar trust set out to overcome all 
these competitors, and by 1892 had acquired all of them but one. 

The first to succumb was the California Sugar Refinery at 
I Origmal Petition, p. 51. * Ibid., pp. 51-52. 


San Francisco, owned by Jchn D., Adolph B., and Claus Spreck- 
els. In March, 1891, in order to bring to an end the competitive 
campaign which had been instituted against this company by the 
firm of Havemeyers and Elder, the Spreckels concern entered 
into an agreement with the firm of Havemeyers and Elder 
whereby there was incorporated the Western Sugar Refining 
Company, a California corporation, half of the stock in which 
was taken by each party. The newly organized corporation, 
in accordance with the provisions of the agreement, leased for 
a term of ten years both the Havemeyers and Elder refinery and 
the Spreckels refinery.^ Shortly thereafter the Western Sugar 
Refining Company permanently closed the Havemeyers and 
Elder refinery, and its former owners sold their plant and their 
half interest in the Western Sugar Refining Company to the 
American Sugar Refining Company. The factory continued 
to be so owned (subject to lease) until 1906, when it was 
destroyed by fire; and the stock continued to be owned by 
the American Sugar Refining Company until 191 1, when, 
in accordance with the policy of the new management, the 
American Company disposed of its stock to the Spreckels 
interests. By agreement between the American Sugar Re- 
fining Company and the Western Company the territory in 
which each was to sell its products was fixed, and also the prices 
at which sugar was to be sold.^ 

The control of the Baltimore Sugar Refining Company was 
effected through purchases of its stock in 1891 and 1892. The 
factory of this company was never operated; and subsequently 
it was dismantled, and the company itself dissolved. The pur- 
pose was clearly to stifle a prospective competitor. Obviously 
no economies were effected through the closing of a plant that 
was never allowed to operate. 

In March and April, 1892, the American Sugar Refining Com- 
pany acquired all but one of the remaining competitors. Up to 
March of this year competition between the trust and the inde- 
pendents (the Franklin Sugar Refining Company, the Spreckels 
Sugar Refining Company, the E. C. Knight Company, and the 
^Original Petitioo, pp. 5^53- 'Ibid., p. 54. 


Delaware Sugar House) had been severe, and the price of sugar 
had fallen so low that failure confronted some of these com- 
panies. Relief from this contingency was secured by selling out 
to the trust, — the capitalization of the trust being increased for 
this purpose from $50,000,000 to $75,000,000. Shortly after 
1892 the American Sugar Refining Company consolidated the 
Spreckels refinery and the Delaware house into one; and the 
Franklin and Knight refineries into one. In 1897 the Franklin 
Sugar Refining Company closed its plant, and became simply 
a selling agency for the Spreckels concern. 

By April, 1892, then, the first period of competition with the 
trust had come to an end. The struggle had been severe, but 
brief. It ended in the purchase by the American Sugar Refining 
Company of its leading competitors. In the whole country 
there were left only two refineries that did not belong to the 
trust. One of these was the California Sugar Refinery, leased 
to the Western Sugar Refining Company, half of the stock 
of which was held by the trust; and the other was the small re- 
finery in Boston owned by Nash, Spaulding and Company, — a 
plant which the trust had attempted to buy in 1892, but without 
success. The American Sugar Refining Company produced in 
1892, including the output of the California Sugar Refinery, 
substantially controlled by it, about 98 per cent of the country's 
output of refined sugar.^ 

But not for long did the American Sugar Refining Company 
maintain its well-nigh complete monopolistic control of the in- 
dustry. It immediately took advantage of the situation, and 
advanced the price of refined sugar until the margin between the 
raw and refined had much increased.* Naturally new refineries 
were built in order to profit by the higher prices; in fact the 
history of the trust for a number of years after 1892 was one of 
constant endeavor to crush or to bring into working relations 
with it interests that would not sell out. 

Already in 1891 the Mollenhauer Sugar Refining Company 
had been incorporated; and soon after the purchase of the inde- 
pendent refineries at Philadelphia, this company began to oper- 
* Original Petition, p. 60. * Sec p. 117. 


ate its plant at Brooklyn. In September, 1892, — only a few 
months after the acquisition by the sugar trust of all the Phila- 
delphia refineries, — the National Sugar Refining Company was 
organized. In October of the same year the W. J. McCahan 
Sugar Refining Company was chartered, and in the following 
year started to refine sugar. To hold this competition within 
bounds the American Sugar Refining Company in 1893 ac- 
quired 30 per cent of the stock of the Mollenhauer concern; * 
and in 1894 it succeeded in effecting agreements with its com- 
petitors looking toward a limitation of the output and the fix- 
ing of prices.^ In 1895 the United States Sugar Refining Com- 
pany was formed for the purpose of constructing a sugar refinery 
in Camden, New Jersey (just across the river from Philadelphia). 
But before the plant was ready for operation, the American 
Company purchased all its stock; and the plant was never com- 
pleted. In 1897 the California and Hawaiian Sugar Refining 
Company was incorporated, and in the same year it entered 
upon the refining of sugar at Crockett, California. This con- 
cern refined both cane and beet sugar. Another independent 
enterprise estabUshed in 1897 was the New York Sugar Refin- 
ing Company, fathered by Claus Doscher, a capable refiner 
who had disposed of his property to the trust in 1887, and had 
• given up the business. The New York Sugar Refining Company 
was formed in March, 1897, and its refinery was completed 
toward the dose of 1898. Another very important competitor 
was Arbuckle Brothers, best known as a coffee house. This 
firm owned a machine used for filling, packing, and weighing 
coffee, — a machine which it beUeved could also be profitably 
used in the sugar business. In 1893, therefore, it began to 
buy sugar from the refineries, and to put it up in packages suit- 
able for distribution by wholesale grocers. After some three or 
four years the firm decided that it would build a refinery of its 
own; and by the middle of 1898 the plant was in operation. 

Competition was thus springing up on all sides, and it was 
imperative that something be done, unless the sugar trust was to 

* Hearings on the American Sugar Refining Company, 1911-1912, p. 2924. 

• House Report no. 331, 62nd Cong., 2nd Sess., p. 4. 


abandon its monopolistic puqx)ses. Accordingly, in September, 
iSgS, the American Sugar Refining Company appointed a com- 
mittee to acquire the factories of any and all independents, this 
committee being authorized to pay such purchase prices as it 
might deem fit. In order to facilitate the work of the conmuttee, 
the price of refined sugar was much reduced. Mr. Jarvie, one of 
the partners in the firm of Arbuckle Brothers, testified before the 
Industrial Commission that when his company's refinery was 
completed in August of 1898, the margin ranged from 80 to 90 
cents per hundred pounds; that prices were first cut in Septem- 
ber, and that this price cutting continued unremittedly through- 
out the spring of 1899.^ At the date of his testimony (June, 
1899) the margin was 51 cents per hundred pounds (which was 
approximately the cost of refining), and the margin had been as 
low as 32 cents, which was 20 to 30 cents below cost.* As a 
result of this price war Arbuckle Brothers lost a great deal of 
money — approximately a million and a quarter dollars.* An- 
other oflScer of the Arbuckle firm testified that his company was 
hard put to it to develop its business because the wholesale 
grocers in some localities refused to distribute the goods of 
competitors of the American Sugar Refining Company.* This 
difficulty was obviated in Boston by Arbuckle Brothers dealing 
directly with the retailers. The latter were given sugar at the 
same price as the wholesalers, irrespective of quantity; and even 
as late as 191 1 the firm still dealt directly with the retailers in 
that city.^ A special retaliatory measure directed against the 
Arbuckle firm was the invasion by the American Sugar Refining 
Company of the coffee business. In 1896, having failed in an 
attempt to buy the patented packing machine of the Arbuckle 
firm, the American Sugar Refining Company, through Have- 
meyers and Elder, purchased a large interest in the Woolson 

1 Industrial Commission, I, p. 138. 

'Hearings on the American Sugar Refining Company, 1911-1912, pp. 
^Ibid., p. 1 1 27. 


Spice Company of Toledo, at a cost of $1,150 per share, plus 
commissions.^ The Woolson Spice Company promptly reduced 
the price of coffee, and forced the Arbuckle concern to do like- 
wise. But this campaign did not bring about the desired result. 
The Arbuckle Brothers did not give in, and they are still in the 
sugar business. Moreover, the American Sugar Refining Com- 
pany deemed it advisable subsequently to give up its coffee 
business, the sale of this business being reported by the directors 
in their annual report to the stockholders in 1909. 

The remaining competitors, or " interlopers," as Mr. Have- 
meyer called them, proved more tractable. Through the 
formation in May, 1900, of a holding company, organized 
largely by individuals dominant in the management of 
the American Sugar Refining Company, the other refiners 
of cane sugar were brought into harmony with the trust.* 
The name of the holding company was the National Sugar 
Refining Company of New Jersey, capitalized at $20,000,000, 
half preferred and half common. The National Sugar Re- 
fining Company of New Jersey acquired the entire capital 
stock of the MoUenhauer Sugar Refining Company, the Na- 
tional Sugar Refining Company, and the New York Sugar 
Refining Company (also its entire bond issue), giving in exchange 
therefor $8,250,000 of its own preferred stock. Most of the 
balance of the preferred stock was used to buy 25 per cent of the 
stock of the McCahan Sugar Refining Company. The National 
Sugar Refining Company of New Jersey continued to hold the 
stocks and bonds of these companies, and managed their affairs 
in harmony. The common stock of the National Sugar Refining 
Company of New Jersey ($10,000,000) was given to Mr. H. O. 
Havemeyer, the president of the American Sugar Refining 
Company, as promoters* profit.' Mr. Havemeyer thereupon 

* Hearings on the American Sugar Refining Company, 1911-1912, p. 2932, 
and Lexow Report, pp. 80, 133. 

'In the case of the California and Hawaiian Sugar Refining Company 
cooperative relations were not established until 1903. 

■ Original Petition, p. 75, and Hearings on the American Sugar Refining 
Company, 1911-1912, p. 483. 

\ \ \ 


delivered this stock to himself and to Mr. L. M. Palmer, both of 
them directors in the American Sugar Refining Company, as 
trustees under a voting trust for five years, the beneficiaries 
being Mr. Havemeyer, Mr. Palmer, Mr. W. B. Thomas, Mr. J. 
E. Parsons, and Mr. J. H. Post, all of them, with one exception 
possibly, officers in the American Sugar Refining Company.^ As 
part of this same set of transaotions, the American Sugar Refin- 
ing Company on its own account acquired $5,128,000 of the 
preferred stock of the National Sugar Refining Company of New 
Jersey. (This included the $900,000 of preferred stock in this 
company received by the American Sugar Refining Company in 
exchange for the MoUenhauer stock acquired by it in 1893.) The 
American Sugar Refining Company therefore, either directly or 
through its officers, held three-fourths of the stock of the newly 
organized holding company; and as a natural result competition 
between these concerns was eliminated, except such competition 
as resulted from Mr. Havemeyer's general policy of promoting 
competition for business among the several plants. A suit to 
invalidate the issue of the common stock on the ground that it 
was made without any consideration and contrary to the laws of 
New Jersey, was filed in 1911. Mr. Horace Havemeyer, a son of 
the former head of the American Sugar Refining Company, in tes- 
timony before an investigating committee implied that this suit 
was brought because he (the son) had resigned from the direc- 
torate of the American Sugar Refining Company, and proposed to 
make the National Sugar Refining Company a real competitor.^ 
As the result of this proceeding the common stock was cancelled, 
and the American Sugar Refining Company, owning the major- 
ity of the preferred stock, came into direct control of the com- 
pany. Subsequently it offered to its own shareholders the right 
to subscribe at par for $5,000,000 of its $5,128,200 stock in the 
National Company. Many of them refused to make the ex- 
change; and the American Company thus continued to hold 
nearly one-fourth of the stock in its own treasury. 

* Original Petition, p. 76. 

'Hearings on the American Sugar Refining Company, 1911-1912, pp. 



By 1900, competition, though not eliminated, was clearly held 
within bounds. The natural consequence was an advance in the 
price of refined sugar.^ This, in turn, soon led to the building of 
competing refineries. Among the new enterprises established 
were the Federal Sugar Refining Company, the Warner Sugar 
Refining Company, the Colonial Sugars Company, and the 
Cunningham Sugar Refining Company. 

The American Sugar Refining Company, for its part, con- 
tinued active in the attempt to eliminate competition. In 
1903 the Western Sugar Refining Company, in order to drive 
out of business the California and Hawaiian Sugar Refining Com- 
pany (its only rival for the Pacific Coast trade), swamped the 
markets of the latter with refined sugar sold below the cost 
of production, with consequent financial loss for the smaller 
concern.^ Confronted with bankruptcy, the California and 
Hawaiian Sugar Refining Company agreed in 1903 that for a 
period of three years it would not manufacture or sell any refined 
cane sugar, and that it would permit its beet sugar output to be 
marketed by the Western Sugar Refining Company.' During 
the life of the agreement, the California and Hawaiian c<mcem 
refined no sugar of any kind, either from cane sugar or from 
sugar beets; but it was paid the sum of $200,000 a year, this pay- 
ment being clearly for the purpose of restraining its competition. 

In 1904, also, the American Sugar Refining Company put an 
end to the proposed competition of the Pennsylvania Sugar 
Refining Company.^ This concern had been organized in 1883, 
with a capital of $100,000. In 1903 its authorized capital was in- 
creased to $5,000,000, and the company was nearly ready to begin 
operating a newly erected refinery. A majority of the stock 
of the Pennsylvania Sugar Refining Company (26,000 shares out 
of 50,000) was held by the Champion Construction Company, 
which, in turn, was controlled by Mr. Adolph Segal. The Con- 
struction Company, under contract, was building and equip- 

* See p. 117. 

•Original Petition, p. 81. 

* On this episode see Ori^al Petition, pp. 82-88. 

1 , J ■. J ' ' 


ping the Pennsylvania Sugar Refinery, and it was also building 
a large apartment house in Philadelphia. It was thus in need 
of funds. Aware of these facts, Mr. Gustav E. Kissel, an officer 
and director of the American Sugar Refining Company, acting 
for the company, lent Mr. Segal the simi of $1,250,000 on a one- 
year note dated January 4, 1904. As security for the payment of 
the note when due, Mr. Segal transferred to Mr. Kissel 26,000 
shares and $500,000 in bonds of the Pennsylvania Sugar Refining 
Company, together with written authority to vote the stock, the 
Champion Construction Company having given its consent to this 
transaction. The petition of the government charged that Mr. 
Segal was not aware that the American Sugar Refining Company 
was the real lender of the money, and that he had no reason to 
believe that the lender had any ulterior purpose. But Mr. 
Kissel, controlling, as he did, the Pennsylvania Sugar Refining 
Company, caused four of the seven directors to resign, and him- 
self and three others to be elected in their stead. Thereupon they 
had spread upon the minutes a resolution that the refinery be 
closed. Having prevented the operation of the refinery, which 
would probably have put Mr. Segal in funds with which to meet 
the note, Mr. Kissel and the officials of the American Sugar 
Refining Company succeeded during the years 1904, 1905, and 
1906 — the petition relates — ^in so involving Mr. Segal in business 
complications, and in so embarrassing him, that he found him- 
self unable to pay even the interest on his note; and until 1909 
the note remained impaid and the refinery idle. 

Because of this transaction the receiver of the Pennsylvania 
Sugar Refining Company brought suit against the American 
Sugar Refining Company under the Sherman law for treble dam- 
ages. The American Company finally settled by paying $750,- 
000 in cash, and returning the securities.^ The American 
Company never got back the principal of the loan, hence the 
transaction cost it $2,000,000. Counsel for the American Com- 
pany testified that the settlement was made because the suit 
was instituted at about the time of the underweighing cases, 

^Hearings on the American Sugar Refining Company, 1911-1912, 
p. 220. 


and the feeling against the American Company was so strong 
that the trial would have proven a farce. 

In 1908, another independent concern, the Colonial Sugars 
Company, operating a small refinery in Louisiana, was acquired 
by the Cuban-American Sugar Company. The latter concern 
was a combination of several raw sugar producing companies in 
Cuba, and according to the government petition was operated in 
harmony with the American Sugar Refining Company, the 
latter having, in fact, lent it large sums of money, and having in 
other ways dominated its affairs.* 

This left as independent cane sugar refineries only Arbuckle 
Brothers, the Federal Sugar Refining Company, the Warner 
Sugar Refining Company,^ the Revere Sugar Refining Company, 
the Cunningham Sugar Refining Company, and two individual 
plants, one of which in 1909 was not in operation. 

We turn now to the beet sugar industry, and to the attempt of 
the American Sugar Refining Company to duplicate here the 
considerable degree of success attained in the cane sugar 

The beet sugar industry in this country is comparatively new. 
Prior to 1898 the production of refined sugar from domestic 
beets hardly exceeded in any year 2 per cent of the country's out- 
put of refined sugar. Under the protection afforded by the 
Dingley tariff of 1897, however, the industry developed rapidly. 
In 1901, 7 per cent of the sugar consimied was beet sugar; in 1909, 
14 per cent.' 

Up to 1901 the American Sugar Refining Company had had 
little to do with the beet sugar industry. In 1897 it had pur- 
chased from the Spreckels family a one-half interest in the West- 
em Beet Sugar Company, — a company incorporated in 1887, and 
possessing a factory in California. In the same year (1897) the 
two interests had incorporated the Spreckels Sugar Refining 

* Original Petition, pp. 88-89. 

' These three companies refined in 1909 some 8.70, 6.30 and 2.50 per cent, 
respectively, of the country's output. Hearings on the American Sugar 
Refining Company, 1911-1912, p. 43. 

•Original Petition, p. 93. 


Company, which was to build a new factory in the same state. 
The following year this newly organized company acquired all 
of the stock of the Western Beet Sugar Company, and perma- 
nently dosed the factory. The Spreckels Sugar Company after 
its organization sold all its product through the Western Sugar 
Refining Company, one-half of the stock in which, as we have 
seen, was owned by the American Sugar Refining Company. A 
half-interest in one concern represented, therefore, the American 
Sugar Refining Company's total investment in the beet sugar 
business up to 1901. 

The beet sugar industry, however, was steadily growing "^in 
importance, and in some localities was becoming a serious com- 
petitor of cane sugar. By 1901 there were thirty^one separate 
concerns manufacturing beet sugar, and eight others were plan- 
ning to enter the business.^ The American Sugar Refining Com- 
pany apparently came to the conclusion that it must eliminate 
this growing competition. Having obtained the necessary funds 
by an increase in its capital stock from $75,000,000 to $90,000,- 
000, the company in the summer of 1901 manufactured an un- 
usually large quantity of refined sugar for the purpose, so the 
government petition alleged, of selling it in the markets of its 
rivals.* About the same time Mr. H. O. Havemeyer and Mr. L. 
M. Palmer entered into unlawful agreements with various rail- 
roads leading out of Boston, New York, Jersey City, Philadel- 
phia, and New Orleans, for the transportation at rates much be- 
low the published tariffs of large quantities of refined sugar, and 
for the free storage of this sugar in warehouses belonging to the 
railroads.' The amount of rebates paid to the American Sugar 
Refining Company during the years 1901-1904 totalled $500,000.* 
The next step was the sale of this sugar in the markets of the 
beet sugar companies at prices below the cost of production.* 
This move forced the beet sugar refineries to sell out to the Amer- 
ican Sugar Refining Company or face the prospect of ruin; and 
many of them decided to sell. 

* Original Petition, p. 96. * Ibid., pp. 9^-99. 

' Ibid., pp. 97-98. * Ibid., p. 99. 

» Ibid. 


The most important concern over which control was secured 
was the American Beet Sugar Company. This concern, with a 
capital of $20,000,000, was the leading beet sugar enterprise in 
the country; it had five plants, and was steadily increasing its 
business. The American Sugar Refining Company and the 
American Beet Sugar Company entered in 1902 into a ten-year 
contract whereby the former was to become the supervising agent 
for the disposal of the product of the latter at a commission of 
one-quarter of a cent per pound.^ The American Sugar Refining 
Company agreed during the beet sugar season, — ^beet sugar comes 
on the market only during a limited period following the matur- 
ing of the beet sugar plant, — ^not to sell sugar in the markets of 
the American Beet Sugar Company except at its regular open 
price at the point of production, plus freight. This clause was 
inserted, according to the vice president of the Beet Sugar Com- 
pany, to prevent local price cutting by the trust.^ A drop in the 
price of refined sugar at the Missouri River from 5 cents to 3^ 
cents in one day was not competition, in his opinion, but war- 
fare. Atabout the same time the American Sugar Refining Com- 
pany acquired $7,500,000 of the Beet Sugar Company's stock. 
The agreement remained in force until 1907, and the stock con- 
tinued to be held until 1907 or later; but after 1909 the two com- 
panies do not seem to have acted in cooperation.' The pres- 
ident of the American Beet Sugar Company testified that the 
agre^ent was abrogated on the recommendation of counsel, who 
adnsed that the contract, if not cancelled, would land the 
ijarties thereto in the penitentiary.* 
/ Several other companies were acquired by the sugar trust in 
^^ the years that followed; but we need not go into the details.^ 
Suflice it to say that at high-water mark the American Sugar 
Refining Company had about $35,000,000 in beet sugar 
companies, not including the very large personal interest of the 

* Original Petition, p. loi. 

'Hearings on the American Sugar Refining Company, 1911-1912, p. 389. 
•Original Petition, p. 102. 

* Hearings on the American Sugar Refining Company, 1911-1912, p. 391. 
^They may be found in Original Petition, pp. 103-132. 


various officials of the company — the Havemeyer estate, for ex- 
ample, in 191 1 had about $10,000,000 of stock in beet sugar com- 
panies.^ Of the $35,000,000, approximately $12,000,000 was 
subsequently disposed of, some during Mr. Havemeyer's life, but 
most of it after his death. Yet even as late as 191 1 the company 
had a majority interest in two beet sugar factories, and a min- 
ority interest in thirty-one.^ The total number of beet sugar fac- 
tories in the coimtry was 68.' The trust, therefore, had some 
interest in approximately one-half of the factories, and presum- 
ably on the whole the more important ones. 

Having traced briefly the history of the American Sugar 
Refining Company's attempt to control the sugar industry, we 
may next inquire in more detail into the success of its endeavors. 
To do this with any degree of completeness is difficult; full 
figures, except for recent years, are not available. Nevertheless 
it is certain that the company at one time did succeed in effect- 
ing practically a complete monopoly, and that subsequently it 
lost ground materially. It is probable that it does not now 
control enough of the business to be considered a trust* 

The Sugar Refineries Company (the trustee device) produced 
in 1887 about 78 per cent of the country's output of refined 
sugar.^ The next year, after the acquisition of a leading com- 
petitor, its proportion increased to about 82 per cent. The 
American Sugar Refining Company upon its organization in 
1891 — taking the place of the former "trust" — controlled about 
75 per cent of the refining capacity of the •coimtry.* In 1892 
every competitor in the country except one was acquired, and 
as a result the company produced 98 per cent of the country^s 
output of cane sugar, — the output of beet sugar was a negligible 
factor at that time. This represented the high-water mark. 
During the three years 1907-1909, the American Sugar Refining 

> Hearings on the American Sugar Refining Company, 1911-1912, pp. 559, 
'Ibid., p. 42. 
' Ibid., p. 40. 

^Original Petition, pp. 38-40. 
* See p. 93. 


Company and its affiliated concerns made, according to the peti- 
tion of the government, only about 72 per cent of all the refined 
sugar consumed in the United States not produced from domestic 
beets; and in 1909 about 70 per cent of the total output of re- 
fined sugar, cane and beet.^ The government in bringing a 
dissolution suit would not be likely to underestimate the control, 
hence it is reasonably certain that the sugar trust had lost 
ground. If we may accept figures presented by the American 
Sugar Refining Company, before a congressional investigating 
committee, to prove that the company was not an illegal com- 
bination, the company has been unsuccessful in its attempt to 
control the industry. These figures are shown in the table below.' 


OP Refined Sugar 

IN THE United States, i 900-1910 



Total quanUty 

refined, Barrds. 

000 omitted 

Quantity refined 

by American 

Sugar Refining Co. 


000 omitted 

Per cent refined 

by American 

Sugar Refining Co. 










• 57-90 



Ay%«w ......... 



1902 ......... 













This table, prepared by Willett and Gray, would seem to 
show that the American Sugar Refining Company, at the time 
when the government brought its dissolution suit (November, 
1910), no longer possessed monopolistic control. While in 1900 
it produced 67.30 per cent (about two-thirds) of the total quan- 
tity of sugar refined in this country, by 1910 it was producing 

* Original Petition, pp. 139, 142. 

* Hearings on the American Sugar Refining Company, 191 1-191 2, p. 43. 


only 42 per cent. But these figures hardly portray the real 
situation. While the table may be accepted as representing 
truthfully the actiial production of the American Sugar Refining 
Company, it does not show the degree of control exercised by it. 
For instance, in the production of the company there is included 
one-half of the output of the Western Sugar Refining Company, 
in which the American Sugar Refining Company had a one-half 
interest^ But to consider the other half as competitive would be 
unwarranted. The Western Sugar Refining Company and the 
American Sugar Refining Company worked together in such 
harmony that the total output of the Western Company might 
properly be considered as being controlled by the American 
Company. Adding the other half of the Western Com- 
pany's output we get 43.38 per cent in 1910, instead of 42.14 per 
cent.^ Again, the American Sugar Refining Company had about 
one-quarter interest in the National Sugar Refining Company; 
and the Havemeyer estate held approximately a one-half interest. 
Up to 191 1 the Havemeyers — the only son of Mr. H. O. Have- 
meyer was a director of the American Company imtil January, 
191 1 — ^worked in harmony with the American Sugar Refining 
Company, and therefore the output of the National Company 
could hardly be classed as independent.* The output of the 
National Company in 1910 was 1 1.40 per cent of the total,^ which 
being added to the figure of 43.38 per cent would raise the per- 
centage of the American Sugar Refining Company to 54.78. 
Finally, the American Sugar Refining Company had in 1910 an 
interest in eleven beet sugar companies, refining 7.43 per cent 
of the coimtry's output of sugar.* Were we to include the pro- 
duction of these concerns, the American Sugar Refining Com- 
pany controlled in 1910, — the year in which the government 
brought its suit, — 62.21 per cent of the total output.* Whether 

^ Hearings on the American Sugar Refining Company, 1911-1912, p. 43. 

* IWd., p. 57. 

* See p. 98. 

* Hearings on the American Sugar Refining Company, 191 1-1912, p. 58. 
»IbkL, p. 58. 

*This includes none of the output of the McCahan Sugar Refining Com- 
pany (producing about 3.0 per cent of the total output), one-fourth of the 


this was sufficient to enable it to dominate the industry is open 
to question. Yet it is clear that the sugar trust was not able to 
maintain its position against the independent refiners, in ^ite 
of the fact that it assimilated from time to time its more vigorous 
competitors. Moreover, by 1919 the proportion of the American 
Sugar Refining Company, as calculated by Willett and Gray, 
had fallen to 27.02 per cent, as compared with 42.14 per cent in 
1910.' What does this indicate as to the economies of the trust 
form of organization? 

As usual, it is difficult to obtain information as to the nature 
and importance of the economies effected by the establishment 
of a trust. Mr. Havemeyer, when asked by the Industrial 
Conmiission as to the advantages that resulted from the organi- 
zation of the sugar trust, replied that the greatest advantage lay 
in working the refineries full and uninterruptedly. We may quote 
from his testimony. "If you have a capacity of 140,000,000 
and can only melt 100,000,000 somebody has got to cut down 
materially. The moment you cut down you increase the 
cost; by buying up all the refineries, burning them up, and 
concentrating the meltings in four refineries and working them 
f uU, you work at a minimimi cost. . . . 

"Q. So the chief advantage in the combination was in con- 
centrating the production and destro)dng the poor refineries? 

"A. Precisely." ^ 

The demand for sugar varies, of coiu-se, from time to time, 
and the American Sugar Refining Company realized a further 
gain through its practice of adjusting the supply of sugar to the 
demand by its use of the Brooklyn refinery. The refineries at 
Boston, Jersey City, Philadelphia, and New Orleans' were run 
to their full capacity practically all of the time, while the output 

stock of which was held by the National Sugar Refining Company of New 
Jersey. Hearings on the American Sugar Refining Company, 1911-1912, 

P- 43- 

* See Annual Report of the American Sugar Refining Company, 1919, p. 23. 

* Industrial Conunission, I, pp. 109-110. 

■ The necessity of importing raw sugar has influenced the establishment of 
refineries at Boston, New York, Jersey City, Philadelphia, Baltimore, New 
Orleans, and San Francisco. 


of the Brooklyn refinery was made to fluctuate according to the 
state of the market. By this arrangement the loss resulting from 
a partial output was concentrated on one plant, especially 
designed for the purpose. It has been estimated that the Ameri- 
can Sugar Refining Company through this device effected a 
saving at times of as much as one-eighth of a cent per pound. 
Obviously this represents an advantage only when the demand 
for sugar is so small that all the plants can not be operated at 

According to Mr. Havemeyer the bringing of a nimiber of men 
into a combination was also advantageous in promoting im- 
provements and more skilful methods; for each man absorbed 
ideas from the others.* The saving in the cost of superintend- 
ence, in his opinion, was inappreciable. 

The trust also had an advantage, perhaps, in handling labor 
difficulties. A strike declared at the Brooklyn refinery in the 
summer of 1910 was defeated, largely because the American 
Company, having two refineries in reserve, was able to supply 
the demand for sugar without operating the plant at which 
the strike occurred.* 

In spite of these advantages, and perhaps others, the inde- 
pendent refiners have stated most emphatically their belief that 
they could make sugar as cheaply as the American Sugar Refin- 
ing Company. Mr. Jarvie, a partner of the firm of Arbuckle 
Brothers, testified before the Industrial CoDMnission that his 
refinery was large enough and well enough equipped to secure 
the advantages of the division of labor as completely as the 
American Sugar Refining Company; and that the latter could 
not refine and sell sugar more cheaply than his firm.' Mr. 
Arbuckle testified in 1911 as follows: "We claimed, and I believe 
the trade claimed, that we had the most economical refinery in 
the coxmtry, and that we could refine sugar as cheap, if not 
cheaper, than any of them." * Mr. Gilmore, of the same con- 

* Industrial Commission, I, p. no. 

* Hearings on the American Sugar Refining Company, 1911-1912, p. 2994. 
' Industrial Conunis^on, I, p. 139. 

* Hearings on the American Sugar Refining Company, 1911-19x2, p. 2318. 


cem, testified that his firm after considerable experimentation had 
found an output of 7,500 barrels a day to be the most economic 
unit.^ When asked whether a sugar refinery had to be enor- 
mously large to refine economically, he replied that that was not 
his experience. The plant might be too large; and thus be 
cumbersome. An output of 20,006 barrels, for example, would 
not, in his opinion, show any economy over 7,500 barrels. Fur- 
thermore, it did not require a combination of refineries to manu- 
facture sugar economically. 

The foregoing testimony of the independents is not regarded 
as proof of the inabiUty of the American Sugar Refining Com- 
pany to produce more cheaply than its smaller rivals. The 
company, for its part, claims just the opposite. In the Annual 
Report for 1909, for example, the company, referring to the fact 
that the new refinery at Chalmette, Louisiana (near New Or- 
leans) was equipped with the latest labor-saving machinery, 
stated that it was expected that sugar could be refined more 
cheaply at this refinery than at any other in the country.* The 
relative economy of single plants and combined plants thus 
appears to be a matter upon which the disinterested investigator 
can as yet do little but speculate. 

Such monopolistic control as the American Sugar Refining 
Company had at the date of the government dissolution suit 
(1910) was not the result of its ownership of the principal raw 
material. The acting president of the company introduced as 
part of his testimony before a congressional investigating com- 
mittee* a statement of the company to the eflFect that it owned 
no cane sugar lands, and was not interested directly or in- 
directly in such lands.' A few officials of the company, includ- 
ing the acting president, then owned sugar lands in Cuba, 
but the testimony was that this sugar was sold to the highest 
bidder. Of course, the fact that the American Sugar Refining 
Company was such a large buyer of raw sugar gave it some 

^Hearings on the American Sugar Refining Company, 1911-1912, 
pp. 1151-1152. 
* Ibid., p. 2991. 
' Ibid., p. 40. 


control over the price, but this is quite different from the estab- 
lishment of a monopoly through the actual ownership of the 
supply itself. 

Neither was the American Sugar Refining Company's power 
the result of patent rights. The company does not appear to 
have derived any special advantage through the control of 
patented machinery. 

To what, then, may we ascribe its more or less dominant 

The record of the trust's relations with the federal govern- 
ment is not one of which it can be proud. The trust has been 
a noted recipient of tariff favors. Without venturing to discuss 
the merits of the protective system, it may be said that the 
sugar duties for many years have been arranged without refer- 
ence to any legitimate protective principle. The differential 
on refined sugar under the act of 1883, for example, was con- 
siderably greater than the total cost of refining, and this virtu- 
ally prevented the importation of refined sugar.^ The prohibi- 
tory duty undoubtedly promoted the establishment of the trust 
in 1887, and enabled it to make enormous profits. In the act of 
1890 raw sugar was admitted free (a bounty being given to 
domestic producers), but the differential on refined was still 
high enough to shut out foreign competition,* and therefore to 
facilitate the charging of monopoly prices, especially upon the 
practical elimination of domestic competition in 1892. Hosti- 
lity toward the sugar trust became intense during the early 
nineties, and for a time bade fair to lead to the entire removal 
of the duty on sugar, both raw and refined, in the Wilson tariff 
act of 1894. Yet it is a matter of history that from this struggle 
the trust emerged the victor.* Duties were somewhat reduced, 
but they were still more than ample. From 1894 down to the 
enactment of the Simmons-Underwood bill of 1913, the duties 
on sugar restrained foreign competition, and thus made it easier 

^Taussig, Some Aspects of the Tariff Question, pp. 103-104. 

• Ibid., p. 106. 

• Sec Taussig, Tariff History of the United States, fifth edition, pp. 305- 




for the trust to maintain monopoly prices. Mr. Havemeyer, 

the head of the sugar trust \mtil his death in 1907, stated before 
the Industrial Commission that " the mother of all trusts is the 
customs tariff bill. " ^ Though this is certainly not the whole 
truth, — the causes of trusts lie deeper than this, — ^it is true that 
the tariff greatly facilitated the establishment of monopoly con- 
ditions in this industry. And no one realized this better than 
Mr. Havemeyer. The removal of the tariff on refined sugar, he 
testified, "would kill the sugar industry."^ . . . "It would inflict 
a terrible and infamous wrong upon 100,000 people dependent 
upon it." ... "It would permit America to be the dumping 
ground of all the beet sugars of Germany, Austria, France, and 
Russia." Such action would represent "merely truckling to a 
miserable clamor — a, bugaboo — this babble about trusts."* 
While the tariff was held to be the mother of trusts, Mr. Have- 
meyer made one exception, and that exception was the sugar 
refining industry.^* 

Of recent years the situation in this regard has improved. 
The management of the sugar trust has changed for the better, 
and little is heard of attempts to dictate tariff legislation. More- 
over, the sugar refiners seem to have imdergone a change of 
heart with respect to the tariff on sugar. A high duty on raw 
sugar makes the growing of sugar beets more profitable, and 
thus increases the quantity of sugar refined from domestic 
beets as compared with cane sugar. High duties on raw sugar 
therefore work against monopoly, since the sources of supply 
for beet sugar are widely scattered, and the beet factories are 
small, and consequently hard to control. On the other hand, a 
low duty on raw sugar — or none at all — ^makes the growing of 
sugar beets unprofitable in many sections, and thus stimu- 
lates the cane sugar branch. The result is that we find some 

^ Industrial Commission, I, p. loi. 

'This is denied by Professor Taussig. "The [sugar] refining industry, 
whether or no it needed protection in earlier days, ceased to need it by the 
close of the nineteenth century." Some Aspects of the Tariff Question, p. 107. 

* Industrial Conunission, I, p. 115. 

*Ibid., p. loi. 


of the officials of the American Sugar Refining Company in 
favor of disposing of the beet sugar properties, and of re- 
ducing the tariff on sugar.^ 

One of the worst charges that may be made against the 
American Sugar Refining Company is the fact that, though at 
times it practically framed the sugar schedule, it sought to 
avoid payment of the custom duties on raw sugar by tampering 
with the weighing scales at the ports in such manner as to regis- 
ter false weights. An investigation undertaken by the govern- 
ment in 1907 resulted in a suit against the company to recover 
the amount of money stolen from the government through false 
weighing at the Brooklyn plant. The evidence in the suit, 
according to the Attorney General, revealed a long continued 
system of defrauding the government, of unparalled depravity.* 
The District Court gave a judgment ordering the company to pay 
the United States $134,411, representing unpaid custom duties.' 
Thereupon the company opened negotiations with the govern- 
ment, and in 1909 a compromise was made whereby the latter 
accepted the judgment of $134,411, plus an additional sum of 
$2,000,000, in full settlement of all civil liabilities of the com- 
pany for any underweighing at either the Brooklyn refinery or 
the Jersey City refinery.* 

The government especially reserved the right to institute 
criminal prosecutions against the officials responsible for the 
underweighing. Subsequently suit was brought against the 
secretary of the company, and the general superintendent of the 
Brooklyn refinery. Both of them were convicted of fraud; and 
upon i^peal their conviction was sustained by the higher courts.^ 
TTie former was given a sentence of eight months' imprisonment 
and a fine of $8,000 and costs; and the latter was given two 
years in jail and a fine of $5,000. Both petitioned for executive 
demency, and by order of President Taft the sentence of the 

^ Hearings on the American Sugar Refining Company, 1911-1912, p. 2052. 

* Annual Rqx>rt of the Attorney General, 1909, p. 12. 

•Ibid., p. II. 

*Ibki.»p. 12. 

'Ibid., 1910, p. 21; 1911, p. 20; 1913, p. 27. 


fonner was commuted to fine and costs, and of the latter to 30 
days in jail. 

The importance of these underweighing practices, however, 
must not be exaggerated. They evidence the cupidity of the 
sugar companies, or perhaps the desire of their managers to get 
results (and thus earn their salaries) ; but even if never discovered, 
they would not have helped the trust appreciably to maintain 
its position, except by providing it with the sinews of war. At 
best, they would merely have enabled it (and the other com- 
panies that carried on these practices) to make somewhat larger 

The American Sugar Refining Company has also been guilty 
of other abuses. It has been the recipient of special railroad 
favors. Freight in the sugar trade is an important item; the 
territory in which a sugar refining concern can profitably sell 
depends largely on the freight rates. Both the testimony of 
officials and the decisions of the courts bear witness to the fact 
that the American Sugar Refining Company has obtained rail- 
road rebates; ^ in fact, the federal government has collected 
large sums of money by way of fines for these illegal practices.* 
The company has also made use of local price discrimination, 
factor's agreements, and covenants restraining sugar refiners 
from reentering the field. A special form of competition directed 
against the beet sugar companies — so the government petition 
charges — was the practice of erecting beet sugar factories in the 
neighborhood of proposed independent plants, and of contract- 
ing for all the available beets in the neighborhood, thereby 
making it impossible for the independent factories to engage in 

The American Sugar Refining Company, up to the death of 
Mr. Havemeyer in 1907, was a great advocate of secrecy in 
corporate affairs; and subsequent events made it clear that this 
policy was adopted mainly because so much was being done 

*See Hearings on the American Sugar Refining Company, 1911-1912, 
pp. 301-302, 1419; and 212 U. S. 481-499. 

* Original Petition, p. 91. 

* Ibid., p. 147. 


that could not bear the light of day. Up to 1907, for example, 
very UtUe information was given out in regard to the earnings 
of the company. Mr. Havemeyer, in answer to the queries of 
the Industrial Commission, stated the philosophy which under- 
lay this attitude of the company. "Q. — ^Do you believe that 
these trusts should be put more specifically under governmental 
control than they are, that they should have examination or 
inspection similar to the national banks? Mr. Havemeyer. — 
Not at alL I think the Government should have nothing to do 
with them in any way, shape, or manner. 

" Q. — You think, then, that when a corporation is chartered 
by the State, offers stock to the public, and is one in which the 
public is interested, that the pubUc has no right to know what 
its earning power is or to subject them to any inspection what- 
ever, that the people may not buy this stock blindly? 

" Mr. Havemeyer. — Yes; that is my theory. Let the buyer be- 
ware; that covers the whole business. You can not wet nurse 
people from the time they are bom until the time they die. 
They have got to wade in and get stuck, and that is the way men 
are educated and cultivated. " ^ 

Of recent years, however, the policy of the company has 
changed. According to its officials, its policy is to give the 
greatest possible publicity to its affairs. 

Railroad favors and unfair competitive methods thus helped 
the sugar trust to establish its position. But undoubtedly the 
greatest source ojf the sugar trust's strength was its financial 
ability to buy out those concerns that proved themselves able to 
compete successfully with it. The tariff wall shut out foreign 
axnpetition; all that was necessary to retain control was the 
acquisition of the strongest concerns in this country. During 
the earlier years of the life of the trust, this policy of buying out 
competitors proved generally successful, in spite of the per- 
sistence of these competitors. But recently, especially with the 
development of the beet sugar industry, the American Sugar 
Refining Company has been steadily declining in relative im- 

* Industrial Commission, I, pp. 122-123. 


portance. Apparently it is losing its right to be called a trust. 
A seeker after truth might properly inquire, why, if the trust 
form of organization is in fact more efficient, the sugar trust has 
not held its own against independent refiners, even with the 
purchase now and then (at excessive figures) of the more 
aggressive of its competitors? Before accepting industrial mo- 
nopoly as a natural evolution, he would be justified in asking 
for more proof of the fact of such economies. 

As to the influence of the trust on prices, the former head of 
the American Sugar Refining Company claimed that the sugar 
trust had been a benefit to the country; that it had reduced 
prices to the consumer. As proof, he compared the average 
margin ^ between raw and refined sugar during the nine years 
1879 to- 1887 — the trust was established in 1887 — ^with the 
average margin during the eleven years 1888 to 1898. His 
comparison showed that whereas the margin averaged 1.098 
cents during the period prior to the organization of the trust, it 
averaged only .966 cents during the period subsequent thereto.* 
This proved, it was claimed, that the consumer had benefited by 
the existence of the trust. 

This comparison, however, is not convincing. The period 
prior to 1887, as the following table shows, was one of high 
margins during the years 1879 to 1882, but also one of rapidly 
declining margins. The scale of operations was being greatly 
expanded, with a consequent lowering of costs; and comp)etition 
being active, lower prices for refined sugar and lower margins 
were the natural result. Had Mr. Havemeyer compared the 
four years 1884 to 1887 with the four years 1888 to 1891 or with 
the four years 1892 to 1895 — the American Sugar Refining 
Company was organized in 1891 — ^he would have arrived per- 
force at the opposite conclusion. 

A more significant study is the course of prices year by year, 

^ Because of the frequent fluctuations in the price of raw sugar, the signifi' 
cant figure is not the price of refined sugar, but the difference between the 
price of raw and refined sugar, known as the margin. The margin represents 
the cost of refining, plus profits. 

* Industrial Commission, I, p. 103. 


interpreted in the light of the facts related in the historical 
survey. These prices are shown in the table below. 

Price of Raw and Refined Sugar, and Margin Between them, 

1879 TO 1914 * 




Granu- 1 


lated in 




' testing 




r testing 

barrels, M 


9^. Per 


p<r. Per 







• 7.423 




•. 3.557 




. 8 





.. 4 


4 965 



. 8. 



1. 416 


.. 4 





. 7 


9 234 



.. 4 


S-320 ^ 



. 7 





.. 4 


5 050 I 








■ . 3 





. S 





. 3 





• S 


6. 117 



. 3 





• 5 





.. 4 










. 3 





. 6, 





. 3 





• 5 


6. 171 



.. 4 










• 4. 










- 4 





. 3 



1. 153 


. 4 









191 2. 

• 4 





. 3 





• 3 







4 532 



• 3 




During the first four years shown in the table the margin 
between the price of raw and refined sugar was high. Costs were 
hi^, and the margin was necessarily high, if refineries were to 
make a reasonable profit. During the early eighties, however, as 
shown elsewhere, sugar refineries were much enlarged; and it 
became apparent that only those refiners could live who were in a 

'Industrial Commission, I, p. 103; and Willett and Gray's Weekly 
Statistical Sugar Trade Journal. 

* Trust formed the year previous. 

*In March and April of this year the four Philadelphia refineries were 


position to secure the economics of large-scale production. The 
result of this movement was increased output, lower costs, and 
reduced margins. The margin had been 1.362 cents per pound 
in 1879, and 1.437 cents in 1882; by 1887 it had fallen to .768 
cents. In October, 1887, the Sugar Refineries Company — ^a 
trustee device — became operative, and the next year the margin 
rose to 1.258 cents, an increase of almost half a cent a pound. 
Possibly the margin in 1887 was so low that even under comp)eti- 
tive conditions it would have subsequently increased, and there- 
fore it may not be correct to ascribe all the advance to the trust. 
Nevertheless it would seem to be clear that the trust did ad- 
vance prices in 1888, and that they were higher than they would 
have been had it not been for the trust. In 1889 the margin 
continued high, though somewhat less than in 1888. These 
high prices, however, could not be maintained. The price of 
refined sugar dropped even more than the price of raw, and the 
margin in 1890 was only .720 cents, and in 1891, .828 cents. In 
March and April of 1892, it will be remembered, the four Phila- 
delphia refineries were acquired, and the American Sugar Refin- 
ing Company produced 98 p)er cent of the coimtry's output. 
The margin increased from .488 cents per pound in February to 
.916 cents in March, and to 1.105 cents in April. ^ The average 
margin for the year was 1.035 cents in 1892, and 1.153 cents 
in 1893 (a panic year). These high margins led, even in a 
period of industrial depression, to the building of a number of 
competing refineries; and this would seem to explain, in part at 
least, the lower margins from 1894 to 1897. In 1898 both the 
Doscher and the Arbuckle refineries began operations. In that 
year the margin fell to .730 cents, and in 1899 to .500 cents. 
Mr. Havemeyer testified before the Industrial Commission that 
the decline in the margin in 1898 was caused by competitors (or 
** interlopers" as he called them) starting active operations.* 
The margin for 1899 averaged .50 cents per pound. This was 

* Jenks, Bulletin of the Department of Labor, vol. V, no. 29, p. 713. For 
weekly quotations see Report of the Federal Trade Commission on the Beet 
Sugar Industry in the United States, pp. 108-122. 

* Industrial Commission, I, p. 108. 


undoubtedly below the actual cost of refining. Mr. Doscher 
testified before the Industrial Commission that refining then 
cost from .50 to .60 cents per pound, but as a rule about .60 
cents. ^ Others placed it at .63 cents, .65 cents, and between .50 
cents and .75 cents.^ Obviously such a low margin could not 
long continue. In the middle of 1900 the National Sugar Refin- 
ing Company of New Jersey, controlled by the American Sugar 
Refining Company and its stockholders, acquired three of the 
independent concerns, including the Doscher, and the margin 
went up to .754 cents. The full effect of these acquisitions was 
not felt, however, imtil the year 1901, when the margin rose to 
1.003 cents per pound. This differential made the manufacture 
of sugar quite profitable, and as a result new refineries were con- 
structed. By 1902 the margin had fallen to .913 cents. After 
that date and down to 1914 at least, though there were some 
fluctuations, the margin showed surprisingly few changes of any 
importance. Mr. Gilmore, of Arbuckle Brothers, said in 191 1 
that the margin from 1905 on indicated competitive conditions.* 
There was no longer a sugar war, he said, but a condition of 
armed neutrality. Each refiner was trying to do the best he 
could for himself, and meanwhile watching the other fellow 
pretty closely. The cost of refining cane sugar then ran from 
about .60 to .65 cents per pound; ^ the margin averaged about 
.90 cents per pound; and there was left about one-quarter of a 
cent per pound for profit. The American Sugar Refining Com- 
pany, gradually losing control of the industry, was unable, 
apparently, after 1905 to raise the price much, if any, above a 
competitive level. 

The dividends of the American Sugar Refining Company point 
to monopoly prices during the period when the company was at 
the height of its power, and to the leveling effect of competition 
on prices. 

' Industrial Commission, I^ pp. SS^ 94. 

'Ibid, pp. 112, 150; Hearings on the American Sugar Refining Company, 
1911-X912, p. 1 134. 
• Hearings on the American Sugar Refining Company, 1911-1912, p. 1140. 
^Ilnd., pp. 1 149, 1986, 2260; and Original Petition, p. 34. 


Since its organization in 1891 the American Sugar Refining 
Company has r^;ularly paid 7 per cent on its preferred stock and 
the following rates on its common stock: 

Common Stock Diyidbnds of the American Sugar Refining Company, 


1891 8 

1892 9 

1893 22 

1894 12 

1895 12 

1896 12 

1897 12 

1898 12 

1899 12 

1900 6)4 

Just how much water there was in the stock can not be stated 
with certainty. The capitalization of the companies that went 
into the trust in 1887 was $6,590,000;^ the amount of trust 
certificates issued in 1887 and of stock in 1891 was $50,000,000, 
minus 15 per cent treasury stock. The capitalization of the 
trust thus exceeded the capitalization of the constituent com- 
panies by more than six times. But according to Mr. Havemeyer 
the constituent companies were undercapitalized; their assets 
were worth much more than the amount of the capitalization. 
The Industrial Commission in its review of evidence states that 
the American Sugar Refining Company, beyond question, was 
capitalized at a sum at least twice as large as the cost of recon- 
structing the plants in 1899 to 1900, and the cost of building was 
then very much higher then than it had been at an earlier date.' 
The value of the brands, which was considerable, must not, 
however, be overlooked. While an accurate estimate of the 
extent to which the capital stock of the trust represented prop- 
erty, and the extent to which it represented the hope of monopoly 

* Lexow Report (1897), p. 384. 

• Industrial Commission, I, p. 13 (Review of Evidence). 


gains, can not be made, there is no doubt that the amount of 
water was considerable. The Court of Appeals of New York 
state referred to the stock of the Sugar Refineries Company 
(the sugar "trust") as being "heavily watered." and "proudly 
defiant of actual values; " ^ and Mr. Oxnard admitted that when 
his company joined the trust in 1887 it received $750,000 of 
trust certificates for property worth $200,000, and capitalized 
at $100,000.' 

It is evident that the profits of the American Sugar Refining 
Company during perhaps the first ten years of its existence were 
enormous. In 1893, after 98 per cent of the industry had been 
acquired, the dividends paid on the common stock were 22 per 
cent — a much larger per cent, as a matter of course, on a reason- 
able capitalization. From 1894 through 1899, 12 per cent 
dividends were regularly paid. Since 1900 the profits and divi- 
dends have been much less. The company has been unable to 
charge monopoly prices during the greater part of the period 
smce 1900, and from 1901 to 1915 only 7 per cent was paid on the 
common, — ^not so meager, after all, the actual investment being 
taken into consideration. 

It might seem as if the difiFerence between monopoly prices 
and competitive prices is so small that the matter is not of much 
consequence to the public. The margin at its highest after the 
organization of a sugar trust was 1.258 cents per pound (1888); 
and the normal margin under more or less competitive conditions 
was about nine-tenths of a cent. The difiFerence, therefore, is 
only about one-third of a cent per pound. But this small sum 
amounts to a great deal in the aggr^ate. The total consumption 
of refined sugar in the United States in 1915 was 3,648,108 long 
tons, or 8,171,761,920 pounds. Of this amount, 34.06 per cent, 
or 2,783,302,109 pounds, was refined by the American Sugar 

* 121 New Yoik Reports 614, 635. 

' Hearings on the American Sugar Refining Company, 191 1-191 2, pp. 371- 
373. A committee of the House investigating the American Sugar Refining 
Company declared that the real value of the properties acquired by the trust 
in 1887 was not over twenty to twenty-five millions. House Report no. 331, 
62nd Cong., 2nd Sess., p. 25. 


Refining Company. Had the company been able to get one- 
third of a cent more for its output (as in the halcyon days after 
the formation of the trust), its profits would have been increased 
by $9,277,720; and had all this sum been disbursed in dividends, 
the dividend rate on the (heavily watered) common stock could 
have been increased from 7 per cent to over 27 p)er cent. 

At this point the presentation of facts respecting this trust 
may properly close, and the reader may ponder for himself on the 
problem involved in the collection of a toll (in small amounts 
from each but enormous in the aggregate) from millions of people 
by a trust which has been for a generation a noted recipient of 
tarifif favors. 



The history of the tobacco trust begins with the organization 
of the American Tobacco Company in 1890. After 1887, at- 
tempts had been made to consolidate some of the leading manu- 
facturers of cigarettes, but these efforts proved unsuccessful 
until 1890.^ On January 21 of that year the American Tobacco 
Company was incorporated in the state of New Jersey, with a 
capital of , t2«;.ooo^ooOj — $i^jQoq^^)0 common, and ^10 ^090^000 
preferred.' The American Tobacco Company was a consolida- 
tion of five of the leading manufacturers of cigarettes, producing 

* On the tobacco trust see: Report of the Commissioner of Corporations on 
the Tobacco Industry, part I, Position of the Tobacco Combination in the 
Industry (February 25, 1909), part II, Capitalization, Investment, and 
Earnings (September 25, 191 1), and part III, Prices, Costs and Profits 
(March 15, 191 5); Original Petition in United States v. American Tobacco 
Company et al.; Transcript of Record, in five volumes, in United States v. 
American Tobacco Company et al. (no. 660), and in American Tobacco 
Company et al. v. United States (no. 661); Brief for the United States in 
United States v. American Tobacco Company et al. (no. 118), and in Ameri- 
can Tobacco Company et al. v. United States (no. 119); 164 Fed. Rep. 
700-728; 191 Fed. Rep. 371-431; 221 U. S. 106-193; Industrial Conmiission, 
vd. XIII, pp. 305-342; Report of Joint Committee of the Senate and As- 
sembly appointed to investigate trusts, transmitted to the New York State 
Legislature, March 9, 1897 (Lexow Report), pp. 860-926, 983-998; Jacob- 
stein, The Tobacco Industry in the United States. 

' Report of the Conmiissioner of Corporations on the Tobacco Industry, 
pert I, pp. 64-65. Referred to hereafter as Report on the Tobacco Industry. 
• The fair value of the tangible assets acquired by the American Tobacco 
Company was $3,545,108 plus notes of the oiganizers amounting to $1,825,- 
354, a total of $5,370,462. The balance ($19,629,538) might be regarded as 
representing good will. The Bureau of Corporations, however, found the 
good will to be worth only $8,954,892. The overcapitalization, therefore, 
was very marked. Sec Report on the Tobacco Industry, part II, p. 8. 



in the aggregate 95 per cent of the country's output of cigarettes.^ 
It thus possessed a high degree of monopolistic control. The 
leading concern was W. Duke, Sons and Company, controlled 
by Mr. James B. Duke. Under Mr. Duke's management the 
output of this concern had increased from approximately 
30,000,000 cigarettes in 1883 to 940,000,000 in 1889.^ Mr. Duke 
testified that his company prior to the organization of the com- 
bination did about 40 per cent of the cigarette business of the 
country.* The other four concerns had been prospering, and 
had been increasing their output rapidly.^ Competition among 
them, it is true, had been quite vigorous. Very extensive adver- 
tising had been resorted to, and large premiums had been given 
to merchants and consumers. The Duke concern alone had 
expended $800,000 in advertising and premiums in 1889. These 
heavy selling expenses had greatly reduced the profits of the five 
companies, and had undoubtedly promoted the establishment 
of a combination. But there is little reason to believe that this 
competition had been ruinous to the parties concerned. The 
firm of W. Duke, Sons and Company which, according to its 
president, was worth only about $250,000 in 1885, was worth 
$7>5oo>ooo in 1889.^ Certainly the leading concern found the 
profits enormous, despite the great outlays for competitive 

Having effected a monopolistic position the American Tobacco 
Company sought to maintain this position by entering into 
agreements for the exclusive use of the best cigarette machines; 
in fact, the possibility of acquiring exclusive control over these 

1 221 U. S. 156. 

* Transcript of Record in United States r. American Tobacco Company 
(no. 660), vol. IV, p. 335. 

' Ibid., p. 337. During the ten years prior to 1890 the business of making 
cigarettes was revolutionized through the introduction of patented machines 
(Original Petition in United States v. American Tobacco Company, p. 13), 
and this, no doubt, is a partial explanation of the ability of one company to 
gather to itself such a large percentage of the country's business. 

^ Original Petition in United States v. AmericanTobacco Company, p. 14. 

» Transcript of Record in United States r. American Tobacco Company 
(no. 660), vol. rv, pp. 334, 337. 


machines was one of the inducements to the formation of the 
company.^ The importance of machinery in the manufacture 
of cigarettes is made clear by a report of the Commissioner of 
Labor. In 1876 the labor cost of a cigarette made by hand was 
96.4 cents per thousand; in 1895 for the same cigarette made by 
machinery it was only 8.1 cents per thousand.^ Among the best 
cigarette machines was the Bonsack, and the American Tobacco 
Company almost immediately upon its organization entered into 
a contract for the exclusive use during a period of three years 
of the cigarette machines of the Bonsack Machine Company.' 
The Bonsack Company, as a part of the contract, terminated its 
outstanding agreements with all other manufacturers of cigar- 
ettes. This exclusive control of the Bonsack machines was, 
the Commissioner of Corporations believes, the principal factor 
in the extraordinary success of the American Tobacco Company 
from 1890 to 1895.* Toward the close of 1895, however, the 
Bonsack Company, by adverse court decisions, was deprived of 
its exclusive rights to the most important parts of the machine, 
and as a result the American Tobacco Company lost the ad- 
vantage of this artificial prop. The American Tobacco 
Ccvmpany likewise seciu^ possession of the patents on the 
Allison machine, and was thus able to prevent its use by 
its comi)etitors. Other patents and machines in considerable 
number were acquired by the American Tobacco Company after 
its oigamzation, the purpose in some cases being to utilize these 
patents and machines, in other cases to prevent their utilization 
by competitors. 

In addition (o the endeavor to maintain its position by mon- 
<q>olizing the machinery for the manufacture of cigarettes, the 
cigarette trust employed another policy, — a policy which it 
continued throughout its whole career. This was the acquisition, 
at high prices if necessary, of its most vigorous competitors. 
Cigarette cmnpanies in considerable numbers were acquired 

^ Report on the Tobacco Industry, part I, p. 64. 

' Thirteenth Annual Report of the Commissioner of Labor (1898), p. 73- 

* Report on the Tobacco Industry, part I, pp. 67, 266. 

* Ifa&d., part I, p. 266. 


after 1890, as a means of retaining the monopolistic position 
originally attained.^ The plants thus acquired were generally 
closed; and the brands, though sometimes utilized, were usually 
withdrawn.^ Frequently the owners of the plants acquired were 
compelled to s^ an agreement not to reenter the tobacco 
business again for a number of years.' 

The next trust in the tobacco industry was formed in the plug 
branch. By the purchase of the* National Tobacco Works in 
1891 the American Tobacco Company had acquired several 
popular plug brands. In 1893, Mr. James B. Duke, president of 
the American Tobacco Company, endeavored to engineer a com- 
bination of plug tobacco concerns.* Not proving successful in 
this, the American Tobacco Company in 1894 began an aggres- 
sive campaign for the control of the plug business. As a part of 
the competitive warfare, prices were cut below cost.^ The 
principal brand made use of in this fight was appropriately 
termed " Battle Ax." In 1891 this brand had retailed at 50 cents 
per pound; in 1894 the price was reduced to 30 cents.* This 
policy of price cutting was accompanied by an advertising cam- 
paign, which was pushed most vigorously in the territory of the 
leading competitors. In some sections, indeed, agents of the 
American Tobacco Company presented every man they met 
with a free sample of "Battle Ax." By such means, the Ameri- 
can Tobacco Company, aided as it was by the advantages en- 
joyed through its control of the cigarette trade, was able to 
increase its sales of plug tobacco from 9,000,000 pounds in 1894 
to 38,000,000 pounds in 1897; and its proportion of the total 
production from 5.6 per cent to 20.9 per cent.^ 

*For an account of the cigarette concerns acquired from 1890- 1904, 
see Report on the Tobacco Industry, part I, pp. 67-71, 79-93. 

' Brief for United States in United States v. American Tobacco Company 
(nos. 118, 119), p. 9. 

•Testimony of Mr. James B. Duke before Industrial Conunission, XIII, 

p. 323. 

* Original Petition in United States v. American Tobacco Company, p. 25. 
' 221 U. S. 160. 

• Report on the Tobacco Industry, part I, p. 96. 
' Ibid., pp. 97-98, 


This expansion of its oi>erations, however, was expensive. 
During the four years from 1895 to 1898, the American Tobacco 
Company sustained losses on its plug business amoimting to 
more than $3,300,000.^ This competition was ruinous, especially 
to the concerns unable to make up their losses in the plug branch 
out of the enormous profits of the cigarette branch. It was 
ruinous, not because competition is naturally or inevitably 
ruirious, but because the cigarette trust was deliberately man- 
oeuvring to force the manufacturers of plug tobacco into a com- 
bination. By early in 1898 the outside manufacturers had been 
brought into the proper frame of mind; they had come to favor a 
combination as a means of obtaining relief from the attacks on 
their business. The first plan for a combination fell through, 
however, partly because the promoters feared that the Spanish- 
American War, with its increased revenue taxes, would seriously 
affect the profitableness of the combination. The American 
Tobacco Company thereupon, in the fall of 1898, piu'chased two 
more important plug companies, and apparently was about to 
give its rivals another taste of cutthroat competition. These 
purchases undoubtedly hastened the nlovement for the estab- 
lishment of a combination of the leading plants. By October, 
1898, the definite announcement was made that a consolidation 
of the leading plug plants would be formed, including those 
owned by the American Tobacco Company. The name of the 
consolidated company was the Continental Tobacco Company; 
and it was incorporated in New Jersey on December 10, 1898, 
with an authorized capital of $75,000,000.^ The new plug com- 
bination embraced nearly every important navy plug concern in 
the country, including the firm of P. Lorillard.* But the com- 
bination did not include the Liggett and Myers Tobacco Com- 
pany, possessing the largest single plant of any plug concern. 
And without the Liggett and Myers plant the Continental 
Tobacco Company could hardly carry out its purpose, which was 

* Report on the Tobacco Industry, part I, p. 367. 

• Ibid., pp. 99-100. 

•Ibid. For an explanation of the terms "navy" plug and "flat" plug, 
see Report on the Tobacco Industry, part III, pp. 45-46. 


the monopolization of the plug business. This fact was clearly 
realized, and the attempt was consequently made to acquire this 
concern, though at first without success. 

The inability to seciu^ control of this ccnnpany was due to 
the opposition of an element in its management which had 
planned a raid on the plug combination. In October, 1898, a 
syndicate, consisting of Mr. Thomas Fortune Ryan, Mr. P. A. B. 
Widener, and Mr. Anthony N. Brady, among others, acquired 
the National Cigarette and Tobacco Company, the only real 
rival of the American Tobacco Company in the cigarette busi- 
ness.^ In the same month the syndicate organized the Union 
Tobacco Company of America; and this company took over the 
stock of the National Company. In December, 1898, the Union 
Tobacco Company purchased 86 per cent of the stock of the 
Blackwell's Diu'ham Tobacco Company, one of the leading 
independent smoking tobacco concerns. Early in 1899 it became 
known that the organizers of the Union Tobacco Company held 
an option on a majority of the stock of the Liggett and Myers 
Tobacco Company. The men who had promoted the Union 
Tobacco Company apparently reasoned that a powerful concern 
standing outside the combination would be in a position to exact 
a good price as a condition of joining it; and the company was 
clearly strong enough financially to cause great loss to the combi- 
nation, should a struggle actually take place. This fact was well 
realized by the dominant interests in the cigarette and plug 
combinations, and in 1899 the Continental Tobacco Company 
purchased at a very high figure the Union Tobacco Company, 
and with it secured the Liggett and Myers concern.^ Mr. Duke 
testified subsequently that the purpose in buying the Union 
Tobacco Company was to bring into the fold the wealthy finan- 
ciers who had promoted it; that the American Tobacco "crowd" 
was not strong enough financially.' As a matter of fact, the men 
who controlled the Union Tobacco Company did shortly there- 

* Report on the Tobacco Industry, part I, pp. 73-74. 
•Ibid., p. 100. 

• Transcript of Record in United States v. American Tobacco Company 
(no. 660), vol. rv, p. 367. 


after enter the directorate of either the American Tobacco 
Company or the Continental Tobacco Company, and they be- 
came thenceforth very important factors in the control of the 
whole Tobacco Combination. With the acquisition of Liggett 
and Myers the Continental Tobacco Company produced 56.3 
per cent of the country's output of plug tobacco; and thus 
attained a considerable degree of monopoly control, — 3, control 
later much increased.^ From the outset the Continental To- 
bacco Company was dominated by the American Tobacco Com- 
pany interests, though the American Tobacco Company itself 
held only about one-third of the company's stock.^ Such stock 
as it held it had received in exchange for the plug business which 
it had developed, and which it had turned over to the Conti- 
nental Tobacco Company. 

The formation of the Continental Tobacco Company, domi- 
nated as it was by the American Tobacco Company, added 
greatly to the Combination's control of the smoking tobacco 
business. From-4he.JV£iy..b£ginnillg the American Tobacco 
Ccnnpany had produced some smoking tobacco; it had inherited 
this business from its constituent concerns, each of which manu- 
factured several brands of smoking tobacco.. In 1891 two addi- 
tional smoking tobacco concerns were acquired. As the result of 
these purchases the American Tobacco Company produced in 
1891, 18 per cent of the country's output of smoking tobacco. 
During the next few years, the plug business especially was being 
developed; and by 1897 the American Tobacco Company, de- 
^ite several acquisitions, had increased its proportion of the 
smoking tobacco business to only 22.7 per cent. However, 
several of the companies acquired by the Continental Tobacco 
Company in 1898 and 1899 produced smoking tobacco as well as 
plug, and the result was that by 1900 the combined production of 
the American Tobacco Company and the Continental Tobacco 
Company amoimted to 59.2 per cent of the total output. This 

* Report on the Tobacco Industry, part I, p. 365. For an account of the 
acquisitions of the Continental Tobacco Company from 1 899-1904, see 
Report on the Tobacco Industry, part I, pp. 103-113. 

*Ibid., p. 102. 


gave the Tobacco Combination a very strong hold on this 
branch, — a hold which was subsequently extended. 

Another branch in which the CombmaUon mcreased its 
business was the production of fine-cut tobacco, — a form of 
tobacco used for chewing. From 1890 to 1898 the production of 
fine-cut tobacco by the Combination was very small; it never 
exceeded 6 per cent of the total. ^ But with the organization of 
the Continental Tobacco Company, several of whose constituent 
companies produced considerable amounts of fine-cut tobacco, 
and with several minor acquisitions about the same time by the 
American Tobacco Company, the Combination's percentage of 
the business had increased by 1900 to 50.5 j)er cent, — a percent- 
age greatly increased subsequently. 

Shortly after the organization of the Continental Tobacco 
Company, the dominant interests in the cigarette and plug trusts 
organized a sniiflL trust. Since 1891 the American Tobacco 
Company had produced a small quantity of snuflF, and in 1899 it 
purchased some additional snuff concerns. The Continental in 
1898 had acquired the large snuff business of P. Lorillard and 
Company. The American and Continental companies between 
them sold in 1899 about 32 per cent of all the snuff sold in the 
country.^ This, however, was well under the sales of the Atlantic 
Snuff Company, a combination in 1898 of four concerns produc- 
ing among them 46.5 per cent of the total output of snuff.* 
To get control of the snuff business, therefore, it was necessary to 
wage a competitive campaign against the snuff combination. 
In 1899, then, the American and Continental Companies greatly 
reduced the price on some of the leading brands of snuff, in the 
face of a doubling of the internal revenue tax; and they also gave 
away large quantities of snuff to prospective customers. The 
snuff combination followed suit, and until early in 1900 competi- 
tion was quite vigorous. A combination was then decided upon. 
On March 12, 1900, the American Snuff Company was incor- 
porated in the state of New Jersey. It took over the snuff busi- 

* Report on the Tobacco Industry, part I, p. 408. 
•Ibid., part III, p. 138. 

* Ibid., part I, p. 141. 


ness of the Atlantic SnuflF Company, the American Tobacco 
Company, the Continental Tobacco Company, and the George 
W. Hebne Company.^ The output of the American Snuff 
Company in 1901, its first full year's business, amounted to 80.2 
per cent of the total output of snuff.^ It thus secured a mo- 
nc^listic position in the industry, — an accomplishment that was 
facilitated because of the fact that the greater part of the busi- 
ness was already concentrated in the hands of a few concerns. 
Over 43 per cent of the stock of the American Snuff Company at 
its organization was given to the American Tobacco Company 
and to the Continental Tobacco Company in exchange for their 
snuff business.' This was only a minority, but in view of the 
fact that large stockholders of the American Tobacco Company 
also held stock in the American Snuff Company it amoimted to 

By 1900, therefore, the Tobacco Combination had reached a 
dominant position in the manufacture of all the important 
branches of tobacco except cigars. It produced 92.7 per cent of 
the output of cigarettes; 62 per cent of the plug tobacco; 59.2 
per cent of the smoking tobacco; 50.5 per cent of the fine- 
cut tobacco; and 78.0 per cent of the snuff (80.2 per cent in 1901). 

The Combination next directed its attention to the cigar busi- 
ness, the most important of all the branches of tobacco manu- 
facture.* The American Tobacco Company had entered the 
cheroot branch of cigar making in 1891 by the purchase of the 
business of P. Whitlock, the manufacturer of "Old Virginia 
Cheroots"; but for some time thereafter it made no ordinary 
cigars. Shortly after the organization of the Continental To- 
bacco Company, the American Tobacco Company made plans to 
engage in the manufacture of cigars. As the first step in that 
direction, it began experimenting with cigar making machines; 

* Report on the Tobacco Industry, part I, pp. 143-144.. The subsequent 
acquisitions of the company are shown on pp. 146-148. 

• Ibid., part m, p. 138. 

• Ibid., part I, p. 143. 

* The value of cigars in 1904 was abnost 60 per cent of the total value of all 
the manufactured products of tobacco. Report on the Tobacco Industry, 
part I, p. 50. 


its control of the machines for making cigarettes had shown it 
the advantage of producing with the aid of machinery, and of 
controlling the patents on the machinery. But no particular 
success crowned its efforts in this direction; and even to-day 
machinery is not much used except in the manufacture of 
the cheaper grades of cigars.^ In spite of its lack of 
success, in this direction, however, it determined to or- 
ganize a cigar company, and to go after the cigar busi- 
< ness. Accordingly on January 12, 1901, the American Cigar 
Company was incorporated in the state of New Jersey.^ Over 
70 per cent of its stock was subscribed to by the American 
Tobacco Company and the Continental Tobacco Company. The 
American Cigar Company took over the greater part of the cher- 
oot and Uttle cigar business of the American Tobacco Company, 
aiid soon purchased a number of cigar concerns, including the 
Havana-American Tobacco Company, itself a combination of 
cigar companies. These acquisitions made the American Cigax 
Company the largest manufacturer of cigars in the coimtry; in 
1901 it produced 10.9 per cent of the total output of cigars (not 
including little cigars).^ During 1901-1903 the American Cigar 
Company made a determined attempt to monopolize the busi- 
ness. Prices were reduced, cigars given away, an extensive ad- 
vertising campaign carried on, and expensive retail stores fitted 
up.* By such means the leading interests in the Tobacco Com- 
bination apparently hoped to duplicate their success in the other 
branches. But this campaign proved unsuccessful. Enormous 
losses were incurred, and though the outputof the American Cigar 
Company was considerably increased, it manufactured only 16.4 
per cent of the total output in 1903, and even less in the years 
that followed.* 

The explanation of this failure to control the industry is not 
hard to find. In the manufacture of such products as cigarettes, 

* Report on the Tobacco Industry, part I, p. 6. 
^-V 'Ibid., p. 151. 

* See p. 144. 

* Repwrt on the Tobacco Industry, part I, p. 420. 
*See p. 144. 


plug tobacco, and smoking tobacco, machinery is extensively 
used. Even before a combination was formed, there was a 
decided concentration of the business in the hands of a few con- 
cerns; and to bring together these concerns was not particularly 
difficult, especially in the face 9f the pressure that was brought 
to bear on the recalcitrant. But then (as now) a very large pro- 
{x>rtion of the cigars was made by hand. Even when machinery 
was used, it was of much less importance than in the other 
branches of tobacco manufacture. Because of the fact that 
machinery played little part, small establishments were at no 
great disadvantage as compared with large ones. A cigar factory 
could be started with small capital, and naturally there were — 
and are — a great many plants. For these reasons it was difficult 
to establish an effective cigar combination, and even if one 
should be established it would prove well-nigh impossible for it to 
maintain control of the industry. Economic conditions in this 
branch of the trade have thus been such as to thwart the designs 
of the trust promoters. 

The next important combination in the tobacco industry was 
the Consolidated Toh arro Company ^ a holding company organ- 
ized on June 5, 1901, to unite the American Tobacco Company 
and the Continental Tobacco Company, — ^the two principal 
companies in the Tobacco Combination. Immediately upon its 
organization the Consolidated Company, promoted by some of 
the leading financial interests in the tobacco combinations, of- 
fered to exchange its 4 per cent bonds in equal amounts for the 
common stock of the Continental Tobacco Company, and at the 
rate of 2 to i for the common stock of the American Tobacco 
CcMnpany.* This offer was generally accepted by the stock- 
holders. The result was to give more complete control over the 
business to the few financiers who already rather effectively con- 
trolled the management. At the time, the exchange of their com- 
mon stock for the bonds of the holding company had seemed to 
the stockholders to be quite profitable. The common stock of 
the Continental Tobacco Company had never borne a dividend, 
and during a considerable period had sold below $30 per share; 
* Rqx>rt on the Tobacco Industry, part I, pp. 114-115. 



the holders were now assured 4 per cent regularly.^ The common 
stock of the American Tobacco Company, highly watered as it 
was, especially since the declaration of a 100 per cent stock div- 
idend in 1899, paid only 6 per cent, and was earning about 9 per 
cent.^ By the exchange an 8 per c.ent return was practically guar- 
anteed. Yet the organizbrs and stockholders of the Consolidated 
Tobacco Company made enormous profits. They apparently be- 
lieved that the profits of the business would be much greater in 
the future than they had been up to that time. One reason for 
this belief was the probable removal of the Spanish-American 
War taxes on tobacco products, and the conviction that it would 
not be necessary, in view of the control the Combination pos- 
sessed over the industry, to reduce prices by the amount of the 
tax.^ As a matter of fact, the taxes were removed, and the prof- 
its did increase enormously. And these profits largely went, of 
course, not to the bondholders, but to the few men who held the 
stock of the Consolidated Tobacco Company. Over half of the 
stock of this company, in fact, was held by six men, — Messrs. 
James B. Duke, Anthony N. Brady, Oliver H. Payne, Thomas 
F. Ryan, P. A. B. Widener, and William C. Whitney.^ Inasmuch 
as the Consolidated Tobacco Company controlled the American 
Tobacco Company, these six men dominated the whole Tobacco 

The main reason for the formation of a holding company seems 
to have been to effect the concentration of control just described. 
Another purpose, however, was to obtain additional capital in 
order to expand the business of the Combination. One direction 
which this expansion took was the foreign trade. 

Since its formation (1890) the American Tobacco Company 
had had a considerable foreign trade, mainly in cigarettes. Dur- 
ing the nineties it extended this trade considerably. As an aid in 
selling its exported cigarettes, and to secure the advantages of 
production near the market, it acquired several comp)anies in 
foreign countries, including Germany, Japan, Australia, and 
Canada. In the fall of 1901 , the necessary cash being supplied by 

* Report on the Tobacco Industry, part I, p. 120. • Ibid., pp. 124-125. 
«Ibid., p. 121. * Ibid., p. 119. 


t])e organization of the Consolidated Tobacco Company, a deci- 
sion was made to comj)ete more vigorously for the English trade. 
As the first step in this program, the American Tobacco Com- 
pany acquired in September, 1901, the firm of Ogden's (Limited), 
one of the leading tobacco manufacturing concerns in the United 
Kingdom.^ This invasion of their field caused great alarm among 
the other British manufacturers of tobacco, and to protect them- 
selves against the powerful American company thirteen of the 
leading manufacturers united in December, 1901, to form the 
Imi>erial Tobacco Company. The British combination at once 
inaugurated a campaign to drive out the American concern. 
Large bonuses were offered to such customers as would agree not 
to handle American goods for a period of years. The American 
Tobacco Company, through the Ogden's concern, retaliated by 
promising to its British customers all of its net profits for the 
following four years, and in addition £200,000.^ The Imperial 
Tobacco Company then threatened to meet the American To- 
bacco Company in its own territory, and during the summer of 
1902 was reported to be choosing locations for its American 
plants. But in September, 1902, before this threat was carried 
out, an agreement was entered into which brought the struggle to 
an end. 

By this agreement the American Tobacco Company and its 
allied concerns transferred all their business in Great Britain and 
Ireland to the Imperial Tobacco Company.^ This included, of 
course, the firm of Ogden^s. The Imperial Tobacco Company, 
for its part, agreed not to manufacture or sell tobacco in the 
United States, except through the American Tobacco Company, 
though it reserved the right to buy tobacco leaf in the United 
States for its business in Great Britain. The American Tobacco 
CcMnpany and the Imperial Tobacco Company then united in the 
organization of a new corporation to handle the tobacco trade in 
the countries outside of the United States (and its noncontiguous 

* Rqx>rt on the Tobacco Industry, part I, p. 166. 
' Ibid., p. 169. 

*A copy of the agreement is in the Report on the Tobacco Industiy, 
part I, pp. 431-447. 


territories) and Great Britain. The American Tobacco Com- 
pany received two-thirds of the stock of the new company, and 
the Imperial Tobacco Company one- third. The British-Ameri- 
can Tobacco Company (the new concern) was incorporated in 
Great Britain in 1902, and it acquired all the foreign business of 
the American and Imperial Companies. It was provided that 
the British-American Tobacco Company could engage in the 
manufacture of tobacco products in the United States or Great 
Britain, but solely for the purpose of engaging in the export 
trade. After this agreement was entered into the British-Ameri- 
can Tobacco Company rapidly developed its business in foreign 
coimtries, with the result that it established itself in almost 
every country where the manufacture of tobacco was not a 
government monopoly. 

The Tobacco Combination was controlled until 1904 by the 
Consolidated Tobacco Company. But on October 19, 1904, the 
Consolidated Tobacco Company and its two subsidiary concerns 
(the American and the Continental) were merged into a single 
company, — the American Tobacco Company.* This new com- 
pany, until the dissolution in 191 1, remained the dominant con- 
cern in the Combination. 

There were several reasons for the change in organization. 
In the first place, the Northern Securities decision, rendered in 
1904, raised grave doubts as to the legality of the Consolidated 
Tobacco Company, which, like the Northern Securities Com- 
pany, was a holding company. Secondly, it was hoped to im- 
prove the market for the bonds of the Consolidated Tobacco 
Company. These bonds had always sold at a low figure. By 
exchanging a part of these bonds for 6 per cent preferred stock in 
a new company it was believed that the market for the remaining 
bonds would be improved. Thirdly, the insiders desired to con- 
centrate the control of the entire business more fully in the hands 
of the common stockholders.^ Prior to the merger of 1904, the 
preferred stocks of the American and Continental Companies, 
which were largely held by the outsiders, had voting power, 
although not enough to outvote the conmion stock in these com- 

^ Report on the Tobacco Ihdustiy, part I, p. 128. * Ibid., p. 129. 


panies held by the Consolidated Tobacco Company. But by 
the exchange of this preferred stock for bonds m the reorganized 
American Tobacco Company, and by the issuance by the latter 
company of new 6 per cent nonvoting preferred stock, given in 
exchange for part of the 4 per cent bonds of the Consolidated 
Tobacco Company, the power of the insiders in the Combina- 
tion was made even more secure than it had been. 

After the merger in 1904 the same methods that had been 
used from the beginning continued to be employed. This, the 
Supreme Court held, was indisputably established by the record. 
Competitors were acquired; restrictive covenants against en- 
gaging in the tobacco business were taken from the sellers; and 
plants were purchased, not to oj)erate, but in order that they 
might be dismantled.^ 

Thft j^piffpffln T' ^bacco Companv ^ thg ^on^^'^^h'ng fa ctor in the 
w hole Tobacco Combination, w as contrpjl^ byji very few indi- 
viduals . At the end of 1906 this company had a total capitaliza- 
tion of $235,191,950, but of this amoimt only the common stock, 
representing about one-sixth of the total, had any voting power 
for the election of directors, or for the ordinary affairs of manage- 
ment. The great bulk of the common stock was owned by the 
directors and their associates. The twenty-eight directors and 
four other stockholders together owned 77 per cent of the com- 
mon stock; indeed, the ten largest stockholders, six of whom were 
directors, together owned 63 per cent of all the common stock.* 
And since the American Tobacco Company (the 1904 corpora- 
tion) held a large part of the stock of the trusts or combinations 
in the other branches of the tobacco business — the American 
Snuff Company, the American Cigar Company, the British- 
American Tobacco Company, and a vast number of other con- 
cans — the control of the whole Tobacco Combinatibn rested in 
the hands of a very small number of i>ersons.' 

The historical development of the various tobacco combina- 

> 221 U. S. 174-175- 

* Rqx>rt on the Tobacco Industry, part I, pp. 202-203. 
' For a list of the subsidiary companies in the Tobacco Combination in 
1906, ace Report on the Tobacco Industry, part I, pp. 212-218. 


tions and trusts has been briefly outlined. It has been seen that 
these combinations upon their establishment generally possessed 
a high degree of control over the industry. To what extent was 
this control maintained? From lack of more recent reliable data 
we must make use, for the most part, of the figures contained in 
the reports of the Commissioner of Corporations on the Tobacco 

The position of the tobacco trust in the cigarette and little 
cigar business combined for the years 1891-1906 is shown in the 
following table (the records of the Bureau of Internal Revenue 
do not show the production of these products separately until 
1898) : 

Total Output of Cigarettes and LrrrLs Cigars, and Proportion 
Thereof Made by the Tobacco Coicbination, 1891-1966 * 


Per cent 


Per cent 



made by 



made by 







1891 .. 



1899 . . 



1892 ,. 



1900 . . 



1893 .. 



1901 . . 



1894 .. 



1902 . . 



1895 . 



1903 . 



1896 .. 



1904 .. 



1897 .. 



1905 ■• 


83 9 

1898 . . 



1906 . . 



In 1891 the trust produced 88.9 per cent of the cigarettes and 
little cigars made in this country. In 1892 and 1893 its propor- 
tion declined, reaching 85.3 per cent in the latter year. This was 
in spite of the acquisition in 1892 of the large cigarette business 
of Hemsheim Brothers. By 1895, largely through the purchase 
of three of the most important little cigar concerns in the coun- 
try, the trust had increased its control to 87.3 per cent. The 
next year the Drummond Tobacco Company and the Liggett 
and Myers Tobacco Company, plug manufacturers with plants 

^.Report on the Tobacco Industry, part I, p. 325. 


in St. Louis, engaged on a large scale in the manufacture of 
cigarettes, as a measure of retaliation against the American 
Tobacco Company, which was then conducting its destructive 
campaign for the plug business. As showing the importance of 
these concerns, the cigarette output at St. Louis increased from 
twenty million cigarettes in 1895 to three himdred and eighteen 
million in 1896. In 1897 the sales of the American Tobacco 
Company actually declined. The result was a reduction in its 
output from 87.3 per cent in 1895 to 80.0 per cent in 1897. The 
competitors of the cigarette trust had thus given a very good 
account of themselves. But in 1898 the Drummond Tobacco 
Company was acquired by the American Tobacco Company, 
and in 1899 the Liggett and Myers concern came into the fold; 
and as a result the percentage of the American Tobacco Com- 
pany rose from 80.0, to which it had fallen in 1897, to 89.0 in 1899. 
FrcMn then on until 1903 the proportion of the trust declined 
steadily, falling to 82.1 per cent in 1903. In 1904 the percentage 
increased to 86.6, in part because of the acquisition of competi- 
tors; but by 1906 had fallen to 82.3. Though greatly increas- 
ing its output since 1891, the trust did not quite hold its own, 
and had it not been for the purchase of the leading competitors, 
would undoubtedly have lost very heavily; in fact, it is quite 
likely that it would have foimd itself imable to maintain its 
monopolistic position. 

Since 1898 the figures are available for cigarettes and little 
cigars separately. The important data with respect to cigarettes 
axe shown in the table on page 140. 

The table calls for little comment. The acquisition of the 
Drummond, and the Liggett and Myers concerns in 1898 and 
1899 added considerably to the trust's proportion of the cigarette 
business; and by 1899 it was producing 94.7 per cent of the total. 
From then until 1907 its percentage declined every year, with 
the exception of 1904. The increase in 1904 was due in large 
measure to the acquisition in the preceding year of the Wells- 
Whitehead Tobacco Company. The steady increase in the 
cigarette business of the independents up to 1907 can be ex- 
plained in part by the growing preference on the part of the 


Total Output of Cigabettes, and Proportion Thereof Made by 

Tobacco Combination, i 898-1910 * 


ooOfOoo omitted 

Per cent made 
by Combination 






















public for Turkish cigarettes. These, except for the cheaper 
grades, were largely made by hand, and this naturally helped the 
smaller concerns. The independents, principally Turks, Greeks, 
and Egyptians, produced about half of all the Turkish cigarettes 
made in this country.^ After 1907, however, the independents 
lost ground relatively; by 1910 the trust was producing 86.1 per 
cent of the total output. 

The figures just given are for the output of this country. The 
Tobacco Combination, however, was a large exporter of cigar- 
ettes — it was, in fact, practically the only exporter — and its 
proportion of the output produced for domestic consumption was 
somewhat less than its proportion of the total output. Thus, 
whereas in 1908 it had produced 81.8 per cent of the country's 
output of cigarettes, it produced only 76.7 per cent of the cigar- 
ettes entering into domestic consumption.^ 

After 1898 the Tobacco Combination greatly increased its 

* Report on the Tobacco Industry, part III, p. 153. 

' Includes quantities in bonded warehouses for export. 
' Report on the Tobacco Industr>% part I, p. 334. 

* Ibid., p. 329; and part II, p. 43. 



control over the little cigar branch. In 1898 it had produced less 
than half of the little cigars; by 1910 it produced over nine- 
tenths.^ This strengthening of its position can be ascribed to 
causes similar to those which made it possible for it to maintain 
its monopolistic position in the manufacture of cigarettes from 
the domestic leaf. Important among these causes was the 
possibility of manufacturing little cigars economically by the use 
of machinery, and the control by the American Tobacco Com- 
pany of the patented machines.^ 

The development of the Combination's control over the plug 
tobacco business is shown by the table below: 

Total Output of Plug and Twist Tobacco, and Proportion Thereof 
Made by toe Tobacco Combination, 1891-1910 ' 



oooyooo omitted 

Per cetU 

made by 



ooojooo omitted 

Per cent 

made by 


1891. . 
1892. . 




1900. . 


















1902. . 

1903 • 

1906. . 


1908. . 















The total production of plug tobacco has not increased in 
prqx)rtion to the increase in population, but the Combination 
steadily increased its proportion of the business. In 1891, when 
the American Tobacco Company by the purchase of the National 
Tobacco Works entered the plug branch, it produced but 2.7 

* Report on the Tobacco Industr>', part III, p. 181. 

* Ibid., part I, pp. 31, 345- 

* Ibid, part III, p. 49. 

* Includes quantities in bonded warehouses for export. 


per cent of the total output. The monopoly of the cigarette 
trade possessed by it obviously facilitated the expansiou of its 
plug business, since the monopoly profits of the cigarette branch 
could be used to finance a campaign to push the sale of its plug 
tobacco. This competitive campaign caused the American 
Tobacco Company losses exceeding three million dollars for 
the years 1895 to 1898/ but enabled it to increase its percent- 
age by 1898 to 23 per cent of the country's output. The 
American Tobacco Company thus became the most powerfiJ 
concern in the trade. Toward the dose of 1898 the Continental 
Tobacco Company was formed; and early in 1899 this company 
acquired the Liggett and Myers Tobacco Company, and the R. J. 
Reynolds Tobacco Company (a concern with a very large busi- 
ness in the South). As a result the Combination's proportion 
was increased to 56.3 per cent in 1899, and to 62.0 per cent in 
1900. In almost every year after 1900 the Combination in- 
creased its production and its proportion of the total, the per- 
centage having increased by 1910 to 84.9. lu almost every year, 
also, the independent output declined. This decline in the out- 
put of the independent concerns, stated the Commissioner of 
Corporations, speaking of the situation up to 1907, "has been 
almost wholly due to the transfer of plants from the independent 
ranks to those of the Combination."^ A great many of the 
plants thus acquired were closed, and the brands in many cases 
were discontinued. 

The smoking tobacco branch shows the same general situation. 
By means already described, the Combination by 1900 had 
effected control of three-fifths of the smoking tobacco business. 
Slowly, but surely, after 1900 it increased its hold on the indus- 
try, until by 1910 it was producing over three-fourths of the total 
output of smoking tobacco.' After 1900 the independent con- 
cerns, despite the purchase of several of their number by the 
Combination, materially increased their output, but not at so 

* Report on the Tobacco Industry, part I, p. 367. 

* Ibid., p. 34. For details see ibid., pp. 364-375. 

* Ibid., part III, p. 84. Smoking tobacco includes also scrap and rut 
plug tobacco. 


rs^id a rate as the Combination, — which was developing not 
only by internal expansion, but also through outside acquisitions. 

The production of fine-cut tobacco is much less than that 
of plug and smoking tobacco; and it has, moreover, decreased 
since 1890. The Combination increased its control of fine-cut 
tobacco from 50.5 per cent in 1900 to 81.7 per cent in 1905; and 
this percentage was substantially maintained thereafter, the pre- 
cise figure for 1910 being 79.7 per cent.^ 

As already described, with the organization of the American 
Snuff Company in 1900 the Tobacco Combination secured 
control of four-fifths of the country's output of snuff. This 
control was gradually increased, and by 1910 the trust produced 
96.5 per cent of the total output.* The growth since 1901 can 
be explained in part by the absorption of competing concerns, 
but it was due, in the main, to the increased output of the con- 
cerns already owned. The Tobacco Combination's position in 
the snuff business was more monopolistic in 1910 than in any 
other branch of the tobacco industry. 

In striking contrast, as shown by the table on page 144, 
stands the cigar industry. The Tobacco Combination for some 
time previous to 1910 produced only about one-seventh of the 
dgars made in this country; and was not able to increase this 
percentage. It had thousands of competitors, many of whom 
(^)erated on an exceedingly small scale. Unless satisfactory 
machinery can be invented, and the exclusive patent rights on 
its manufacture can be obtained by the Combination, this one 
field of the tobacco industry, in all likelihood, will remain open 
to independent endeavor. 

That the tobacco industry in all the leading branches except 
cigars was controlled up to the dissolution decree (191 1) by a 
trust or a union of trusts has been shown. By what means was it 
able to maintain this control? 

One thing is dear. The Combination was not able to maintain 
its position by virtue of the ownership or control of the leaf 
tobacco, — the most important raw material. The American 
Tobacco Company controlled, it is true, a few companies pro- 

• Report on the Tobacco Industry, part III, p. 127. ' Ibid., p. 138. 


Total Output op Cigars, and Proportion Thereop Made by the 

ToBACxro Combination, 1898-1910 * 


ooOjOOO omitted 

Per cent made 
by Combination 





































ducing leaf tobacco in Cuba and Porto Rico, but it did not — ^nor 
did any other important manufacturer — engage in the raising of 
tobacco in the United States.^ In this respect, therefore, it 
presents a striking contrast to the steel and oil trusts. The 
Tobacco Combination endeavored, to be sure, to restrain the 
operation of the law of supply and demand in the purchase of 
its. leaf tobacco, but it did not obtain nor endeavor to obtain 
permanent control over the production of the raw material 
Clearly there would be little advantage to it in making the 
attempt, since the large amount of land that might be devoted 
to tobacco culture would render the failure of the attempt 

The Tobacco Combination, however, did have a well-nigh 
complete monopoly of the manufacture of licorice paste in this 
country. Licorice, next to leaf tobacco, is the most important 
raw material used in the manufacture of tobacco products. It is 
used mainly in the manufacture of plug tobacco, but also in the 
manufacture of smoking tobacco and snuff. The American 

* Report on the Tobacco Industry, part III, p. 192. 
' Ibid., part T, p. 48. 


Tobacco Company, through the MacAndrews and Forbes 
Company, produced in 1907, 95 per cent of the total output of 
licorice p)aste.* The control of the licorice branch served to 
strengthen greatly the Combination's control of the tobacco 

Other important subsidiaries of the American Tobacco Com- 
pany were the Conley Foil Company and the Johnston Tin Foil 
and Metal Company, manufacturers of tin foil; the Golden Belt 
Manufacturing Company, producer of cotton bags to be used in 
packing tobacco; the Mengel Box Company, manufacturer of 
wooden boxes; several companies making machinery to be used 
in tobacco manufacture, or holding patents on machines; the 
Kentucky Tobacco Product Company, which made nicotine 
extracts out of tobacco stems, the main by-product of tobacco 
manufacture; and the Manhattan Briar Pipe Company, manu- 
facturer of pipes and smokers' supplies.^ 

Neither was the Combination's monopolistic position the 
result of railway rebates, — ^a factor of so great importance in 
building up the Standard Oil Company. Because of the fact that 
tobacco products have generally a large value in small bulk, the 
item of transportation cuts little figure in the relative position 
of competing tobacco concerns. 

It would undoubtedly be a mistake, furthermore, to attribute 
the trust to the tariff. The duties on manufactured tobacco 
products, it is true, have been relatively high, and this has 
restrained foreign competition. But the imports would hardly 
be considerable in any event. The United States is the largest 
producer of leaf tobacco in the world; and though it imports 
some high grade leaf tobacco, chiefly for cigars, it exports huge 
quantities. The abundant raw material thus gives to this 
coimtry a great advantage. The tobacco trust, in fact, is a large 
exporter of cigarettes; in 1906 about one-third of the total out- 
put of cigarettes was exported.^ The trust's ability to hold the 

* Brief for the United States in United States v. American Tobacco Com- 
pany (nos. 118, 119), p. 13. 

* Report on the Tobacco Industry, part I, p. 24. 
•Ibid., p. 57. 


foreign markets indicates that it would be able successfully to 
meet foreign, competition here. The export, as well as the im- 
port, of other tobacco products, however, is Insignificant.* 

When we come to consider the part played by the economies 
of the trust form of organization, we are on uncertain ground. 
That the plants of the Combination, generally speaking, were 
very much larger than those of the independents is certain. This 
was true of every branch of the tobacco industry. We may take, 
first, the cigarette branch. In. 1906 the tobacco trust manufac- 
tured 5,309,000,000 cigarettes, or 82.5 per cent of the country's 
output. Of this amount, 4,240,000,000, or four-fifths of its 
output,was produced in three plants, located at New York City, 
Richmond, Virginia, and Durham, North Carolina.* One plant 
alone — the factory of the British-American Tobacco Company 
at Durham — ^made 1,921,000,000 cigarettes, which was over one- 
third of the trust's output, and almost 30 per cent of the output 
of the whole country. 

This concentration of output was not confined to the factories 
of the trust. In the same year (1906) there were 528 independent 
plants (the large number was due to the fact that Turkish cigar- 
ettes are often made by hand). Yet six of these plants together 
produced over three-fifths (61.9 per cent) of the total independ- 
ent output, or more, therefore, than all the remaining 522 com- 
bined.^ Twelve more yielded 24.6 per cent of the total independ- 
ent output. This means that 18 of the 528 plants turned out 
86.5 per cent of the total output of the independents. Yet in 
spite of this concentration the independent plants were much 
smaller than the trust's plants. Two of the trust plants produced 
more, and one produced almost as much, -as all of the inde- 
pendents put together. Whatever advantage might be derived 
from size belonged, therefore, to the trust. But, of course, the 
vital question is not, could the trust produce more cheaply 
than its competitors — that it c5uld do so is hardly to be ques- 
tioned — ^but could these big plants of the trust produce more 

' Report on the Tobacco Industry, part I, p. 57. 

' Ibid., p. 340. 



cheaply by virtue of the fact that they were united under one . 
ccmtroL In other words, was the low cost of producing cigar- 
ettes by the trust due to the size of its plants or was it due to the 
union of these plants? 

On this point it is difficult to return a definite answer. We 
may refer, however, to the results of the investigation of the 
Bureau of Corporations into the comparative costs of the To- 
bacco Combination and of its successor companies after the 
enforcement of the dissolution decree.^ From this investigation 
it appears that the factory costs of producing cigarettes for the 
trust were $1.74 per thousand in 1909, and $1.70 per thousand 
in 1910; while the factory costs for the companies that succeeded 
the trust were $1.66 per thousand in both 1912 and 1913.^ The 
slight reduction in costs effected by the companies when sepa- 
rated from each other was due largely to lower leaf costs in 191 2 
aud 1913. If we deduct leaf costs, the factory costs were practi- 
cally the same in each one of these years: 54 cents per thousand in' 
1909, 55 cents in 1910, 54 cents in 191 2, and 52 cents in 1913.' 
This shows, to quote the Bureau, "that so far as manufacturing 
cost is concerned the question of relative economy relates pri- 
marily to the size of the factory units and not to the merger of ' 
many factories and companies into a huge consolidation." * Or 
again: "It is evident . . . that the decisive factor in factory 
costs other than leaf has been volume of output of a particular 
brand at a single factory and that the status of the organization 
— that is, whether the factories were in a general consolidation or 
not — ^is a subordinate factor." ^ This conclusion of the Bureau, 
it should be said, did not relate to the cigarette branch alone; it 
was meant to appl^a» well to the tobacco business as a whole. 

The plug plants of the trust were also distinctly larger than 
those of the independent concerns. In 1906 the trust had 8 plug 
plants with an output of 5,000,000 pounds or more each.* These 
plants turned out 91.4 per cent of its total production of plug. 
Yet two of these eight plants produced 59.4 per cent of the 

*0n the dissolution proceedings, see ch. 18. * Ibid., p. 15. 

' Report on the Tobacco Industry, part III, p. 324. ' Ibid., p. 16. 
* Ibid., p. 326. • Ibid., part I, p. 376. 


trust's output, and 48.7 per cent of the country's output. The 
independents, on the other hand, had no plants as large as any 
of these eight; the larger independents had all been acquired 
by the trust. Forty-two and a half per cent of the independent 
production was produced in the seven plants having an out- 
put of 1,000,000 pounds or more, and 50.8 per cent in the 
forty-four plants producing between 100,000 pounds and 
1,000,000 pounds. The balance (6.7 per cent) was produced in 
the remaining plants, 129 in number.' 

The aforementioned investigation of the Bureau of Corpora- 
tions shows for the plug business that the factory costs of the 
companies that succeeded the trust upon its dissolution were 
less than the costs of the trust itself. These factory costs were as 
follows: 20.0 cents per pound in 1909; 19.5 cents in 1910; 18.1 
cents in 1912; and 18.5 cents in 1913.* But the leaf costs of the 
successor companies were distinctly less in 191 2 and 1913 than 
those of the trust in 1909 and 1910; and this explains all the 
decline in factory costs. In fact, if we deduct leaf costs, the 
factory costs of the successor companies were actually greater, 
yet by a very small fraction. It seems to be clear, therefore, 
that so far as factory costs were concerned, it was not the trust 
itself that was principally responsible for the low production 
costs; it was rather the tremendous size of its plants. 

What has been said of the cigarette and plug branches applies 
substantially to the others,^ though especial mention may be 
made of the cigar branch. 

With respect to cigars, the Tobacco Combination in 1906 had 
two plants making over 50,000,000 cigars, the average output of 
these two plants for that year being about 190,000,000.' There 
were no independent plants producing as many as 50,000,000 
cigars; hence the Combination had easily the two largest plants. 
Over one-third of its output, in fact, was produced in these two 

* Report on the Tobacco Industry, part III, p. 224. 

* On smoking tobacco see Report on the Tobacco Industry, part I, pp. 391- 
396, part II, pp. 251-256; on snuflF see part I, pp. 402-406, part II, pp. 307- 


* Report on the Tobacco Industry, part I, p. 425. 


plants. But these plants produced largely cheroots and small 
cigars, rather than the ordinar>' domestic cigars. When we turn 
to the remaining cigar plants of the Combination — 44 in num- 
ber — ^we find that they were of widely varying sizes; and that 
many of them were much smaller than a number of the independ- 
ent plants. It is true that the average output of the Combina- 
tion's cigar plants exceeded by many times the average output of 
the independent factories, but in considerable measure this was 
due to the existence of some 25,000 cigar factories turning out a 
very small output. Except for its two largest factories, the Com- 
bination had no great advantage with respect to size over its 
larger competitors. Were size as important as for the other 
branches, the Combination would doubtless have acquired its 
leading competitors, and thus have strengthened its position in 
this respect. But size was not vital in this branch, and for this 
reason apparently the Combination was not able to establish 
monopoly control. The mere possession of 80 to 90 per cent of 
the cigar manufacture would not enable it to fix monopoly prices 
for any length of time; the increase of independent production 
would be certain, and with it monopoly control would be lost. 

The report of the Bureau on costs does not take up the cigar 
branch, and for this reason a comparison can not be made of the 
costs of the cigar plants of the Combination before and after the 

The foregoing discussion indicates that the size of the plant is 
the determining factor in the cost of production, and that the 
dissolution proceedings, since they left the big plants intact, did 
not aflfect materially the factory costs. But the situation is 
otherwise as to selling costs. The subdi\'ision of the business pro- 
vided for in the dissolution decree led to a duplication of selling 
organization and an increased overhead expense; and the result 
was a general increase in selling costs. Thus, the selling costs of 
the trust in all branches except cigars amoimted in 1910 to 
$7,191,676, while in 1913 the selling costs of the companies that 
succeeded to its business amoimted in the same branches to 
$9,818,746, an increase of over two and a half million dollars.^ 
* Report on the Tobacco Industry, part III, p. 17. 


In every branch, except flat plug and Turkish cigarettes^ the 
selling costs showed an increase. Based on the rates per thou- 
sand or per pound, the selling costs of the successor companies in 
1913 in the cigarette branch were 55 per cent greater than for the 
trust in 1910; 91 per cent greater in the little dgar branch; 1 1 per 
cent greater in navy plug; 39 per cent greater in plug-cut smok- 
ing; 40 per cent greater in granulated smoking; 44 per cent 
greater in fine-cut chewing; and 46 per cent greater in snuff. 
The selling costs of the successor companies for flat plug and 
Turkish cigarettes, on the other hand, were only 76 and 83 per 
cent, respectively, of the costs of the trust in these branches. 

The advertising expenditures of the successor companies also 
greatly increased as compared with the expenses of the trust 
The advertising expenses of the trust in 1910 in all branches 
except dgars were $10,895,132, while those of the successor 
companies in 1913 amounted to $23,623,564, or more than 

The trust may likewise have effected some economies in the 
purchase of its supplies. While the American Tobacco Com- 
pany manufactured many of the articles that it needed in its 
business, including packages, boxes, etc., it had occasion tb buy 
large supplies, such as sugar, rum, flavoring extracts, stationery, 
machinery, tools, and furniture. All of its buying, as well as 
that of its affiliated companies, such as the American Snuff Com- 
pany and the American Cigar Company, was done for it by one 
concern, — the Amsterdam Supply Company.* By buying 
through one company with its experienced purchasing agents, 
the trust was possibly able to get some of its supplies on more 
advantageous terms. 

The trust also foimd the control of patented machinery a 
source of great strength. The concentration of the manufac- 
ture of tobacco in large plants and the specialization of these 
plants, to a large degree, on particular brands, permitted a wider 
utilization of machine methods than was possible for smaller 
concerns. The trust substituted machinery for hand labor 

* Report on the Tobacco Industry, part HI, p. 18. 
' Ibid., part I, p. 265. 


whenever practicable, and it achieved its greatest success in those 
lines in which this was done. In the cigarette and little dgar 
branches, where practically all the processes were performed by 
machinery, the trust, through its control of the patented ma- 
chines, was able to maintain a monopoly position more easily 
than in any other branch of the tobacco industry except snuff. 
In the cigar branch, where machinery is least used, and where 
patents therefore give no advantage, the trust has been weakest. 

The trust, as shown earlier, also made frequent use of the prac- 
tice of local price discrimination, — the weapon so effectively 
employed by the Standard Oil Company. In the localities where 
independents sought a foothold, the trust frequently sold its so- 
called "fighting brands" at a loss; and in this way checked the 
growth of the independent concerns, whose field of competition 
was generally local. This proved especially effective, because the 
campaign of competition could be limited to the comparatively 
few fighting brands held by the trust, the prices of its popular 
brands being generally maintained at the former level. The 
practice of local price cutting touched as a rule, therefore, only 
the fringes of the trust's vast business, but commonly affected 
the total business of the independents, and this made it more 
difficult for them to bear the losses of such a campaign. 

The policy of local price cutting was facilitated through the 
secret ownership of a number of tobacco companies. Many deal- 
ers and consumers had long been opposed to trusts in general 
and to the tobacco trust in particular. To take advantage of this 
attitude independent n^anufacturers frequently advertised their 
goods as " not made by a trust." The refusal of the trust to deal 
with labor organizations had engendered much hostility among 
the trade unionists also, and many of them refused to buy any 
but union made goods. Manufacturers catering to this senti- 
ment were able to develop quite a trade. In order to meet this 
dtuation, the trust, especially during 1903 and 1904, secretly se- 
cured a controlling interest in a number of concerns catering to 
the anti-trust and pro-imion trade. These concerns, after be- 
ing acquired by the trust, continued to operate imder tl^ir 
former management, and pretended to be independent and op- 


posed to the trust. * Those which had friendly relations with un- 
ion labor continued to maintain such relations, though the atti- 
tude of the trust itself was one of bitter hostility to trade union- 
ism. These secretly controlled concerns were, imtil the facts 
became known, a highly effective engine of warfare against the 
real independents.^ 

The American Tobacco Company likewise endeavored to con- 
trol the jobbing trade. In the cigarette bi^siness, for example, a 
factor's agreement, or a consignment agreement as it was called, 
was put in operation in the latter part of 1895.^ According to 
this agreement the jobber to whom cigarettes were consigned 
agreed to sell only to the retail trade, and to sell only at the price 
fixed by the American Tobacco Company. If the jobber did not 
discriminate against the American Tobacco Company's cigar- 
ettes, and fully complied with all the provisions of the agreement, 
he was to be given a conunission of 2>^ per cent on the receipts of 
his sales of cigarettes. If, however, the jobber handled no cigar- 
ettes except those of the American Tobacco Company (and com- 
plied in every respect with the consignment agreement), he was to 
receive an additional commission of 7^^ per cent. Mr. Whelan, 
a wholesale dealer, claimed before the Lexow Committee (1897) 
that a jobber could hardly do business without some of the goods 
of the American Tobacco Company; that 2>^ per cent allowed 
the dealer no profit; and that there was, therefore, a very strong 
incentive to agree to handle the American Tobacco Company's 
goods exclusively.^ This device for holding the trade led to ad- 
verse legislation, and in 1897 was abandoned. 

The ability of the trust to require preference in the sale of its 
goods, — to the extent that it possessed such ability, — ^lay in con- 
siderable measure in its exclusive ownership of a great majority 

* Report of the Tobacco Industry, part I, p. 224. 

* For excellent illustrations of the secret machinations of the trust, see 
Transcript of Record in United States v. American Tobacco Company 
(no. 660), vol. II, pp. 524, 640; and Report of the Senate Committee on 
Control of Corporations, 1913, p. 347. 

' Lexow Report, p. 872. A copy of the agreement is in Lexow Report, 
pp. 878-883. 

*Ibid., pp. 991-992. 


of the popular brands of tobacco products. Some of these brands 
had became such standard articles that dealers had to handle 
them, or lose a great deal of business even in other lines. In fact, 
the trust's monopoly power was to a large extent founded on its 
control of the greater number of the brands enjoying a high 
degree of popular favor. 

The tobacco trust also \mdertook the retail distribution of i 
products. This it did largely through the acquisition of the 
United Cigar Stores Company. This concern had been incorpo- 
rated in New Jersey on May 16, 1901, by persons having no con- 
nection with the trust, to sell and distribute tobacco products at 
retail.^ The company proved so successful that the American 
Tobacco Company acquired a controlling interest in it in No- 
vember, 1901; and thereafter it supplied it with the necessary 
funds for eacpansion.^ The United Cigar Stores Company 
bought its products direct from the American Tobacco Company 
and the Amerlfetn Cigar Company, instead of through jobbers, 
but it handled the goods of independents also. In 1907 the 
United Company had 392 stores, but subsequently the number 
was much increased. 

It is thus clear that a great many factors contributed to the 
success of the tobacco trust in establishing and maintaining its 
monopolistic position. The great *^'^^ ^^ ''^*^ plBUt*^^^** control of 
the licoricejiaste, tariff p^lection . the ownership of patents on 
machinery used in tobacco manufacture, the use of local price 
discrimii)ation and bogus independent concerns, numerous de- 
vices to control the wholesale and retail distribution of its prod- 
uct, — all helped it in the competitive struggle. Yet the growth 
of the trust's control of the tobacco industry, according to the 
Commissioner of Corporations, "has been primarily due to con- 
tinual buying up of independent concerns." ^ Frequent in- 
stances of sucS^ii'rchases have already been given. Their influ- 

* Report on the Tobacco Industry, part I, p. 88. 

* Brief for the United States in United States v, American Tobacco Com- 
pany (nos. 118, 119), p. 12. On December 31, 1906, the American Tobacco 
Company held $340,000 of the $450,000 common stock of this company, and 
ail of its bonds and preferred stock. 

* Report on tlie Tobacco Industry, part I, p. 38. 


ence is further shown by a comparison of the number of factories, 
with their output, owned at diflFerent periods by the trust with 
the number owned by the independents. The years 1897, 1900, 
and 1906 are significant years. From a table given in the report 
of the Bureau of Corporations it appears that in 1897 the trust 
owned five plants producing chewing and smoking tobacco and 
snuflF with an output of five million pounds each, while the in- 
dependent concerns had seven plants of this size.^ In 1900 the 
independents had only one such plant, all of the remaining six 
having been acquired by the trust, which in that year was oper- 
ating ten plants producing as much as five million pounds each. 
By 1906 the seventh independent plant had been acquired by 
the trust, and the trust had increased the output of some of its 
smaller plants, so that it had twenty-one factories all told of the 
size mentioned. There were only two independent concerns pro- 
ducing over five million pounds in 1906, two new concerns having 
arisen with an output of this amount To quote from the report 
of the Bureau, "despite enormous expenditures for advertising 
and in 'schemes' and despite frequent price cutting by means of 
its so-called 'fighting brands' and its bogus independent con- 
cerns, there has been, in several branches of the industry, a con- 
stant tendency for competitors to gain business more rapidly than 
the Combination and thus to reduce its proportion of the output 
This tendency has been overcome only by continued buying up of 
competitive concerns. Many weaker concerns have been vir- 
tually driven out of business or forced to sell out to the Combi- 
nation, either by reason of the direct competition of the latter, or 
as an indirect result of the vigorous competition between the 
Combination and larger independent concerns. In the case of 
the larger and more powerful concerns which it acquired, how- 
ever, the Combination has usually seciured control only by pay- 
ing a high price. The immense profits of the Combination have 
enabled it to keep up this policy." * 

What eflFect has the trust had upon the prices of tobacco prod- 
ucts? We may take up first the cigarette branch. The Amer- 
ican Tobacco Company (the cigarette trust) was organized in 

* Report on the Tobacco Industry, part I, p. 39. * Ibid., p. 41. 



1890^ In what way the establishment of this trust affected 
prices can not be said; the detailed data with respect to the years 
immediately following the formation of the company are not 
obtainable. The really significant figures, therefore, are lacking. 
The prices from 1893 to 1910, however, are available, and these 
are shown in the following table. The prices are wholesale, since 
the trust sold largely to jobbers. 

Wholesale Prices op Cigasettes Received by the Trust on rrs 

Domestic Business, 1893-1910* 




Average per thousand 


Net price 


Net price 
less tax 












1902. ..... 


















S3 52 














I 50 
1. 01 
1. 01 
1. 00 

1. 00 

1. 01 










3 40 

Si -74 




1. 00 








1. 21 
1. 00 
I 05 
1. 12 
1. 16 
I 03 

I 07 

I 05 
1. 10 
1. 00 

The net price less tax on all the cigarette business of the trust, 
ezclu^ve of exports and foreign output, averaged $3.02 per 
thousand in 1893. From then until 1899 it steadily declined, 
reaching $2.01 in 1899. This proved to be the low point. There- 
after imtil 1910 the price increased almost continuously, and in 
that year reached $3.51. But the increase in prices since 1893 or 

' Rqxnt on the Tobacco Industry, part III, p. 155. 

* Indudes manu£acturing, selling, advertising, and freight. 



even since 1899 (the low point) has not been commensurate with 
the increase in the cost of production; and the profit in 19 10 was 
less, therefore, than in either 1893 or 1899. It is diflScult to say 
just what significance attaches to these figures. The important 
thing, clearly, would be a comparison of the range of prices for 
cigarettes after the trust was established in 1890 with the range 
prior to that time. Data on this point being lacking, a compar- 
ison might be made of the prices charged for tobacco before and 
after the dissolution of 191 1. Yet for reasons given on page 472 
such a comparison would not lead to any definite conclusions. 

No conclusions of especial value can be drawn from a study 
of the prices of little cigars. Until 1898 cigarettes and little 
cigars were grouped together in reports made to the Bureau of 
Internal Revenue, and therefore it is not possible to say what 
proportion of the little cigar business was controlled up to that 
time by the trust. In 1898 (when the statistics were first sepa- 
rated) the trust produced 48.7 per cent of the little cigars, and 
its control gradually increased until in 1910 it was as high as 
91.4 per cent. The net price less tax, as the table on page 182 of 
the report of the Commissioner of Corporations on Prices shows, 
was distinctly less in 1910 th^ in 1895 (the first year for which 
these statistics are available ^), and was no higher than in 1898 
when the Combination controlled only halt the little cigar 
industry. But the cost meanwhile had declined greatly. The 
cost in 1 9 10 was 64 cents less per thousand than in 1898, and the 
price about the same as in 1898. It follows that the profit was 
very much larger, — ^in fact, it was more than double. It appears, 
therefore, that the trust was able to maintain prices; that it pre- 
vented the reduction in prices which under competitive conditions 
might be expected to follow a considerable decline in the cost of 
production. To arrive at any definite conclusions, however, we 
should know what prices and costs would have been had there never 
been a little cigar trust, and that of course can not be ascertained. 

The statistics for plug tobacco are perhaps more significant. 

* The American Tobaccx) Company kept the statistics for its little cigar 
business separately as early as 1895. Report on the Tobacco Industry, 
part in, p. 182. 



One reason is that they are obtainable since 1893, or several 
years before the formation of the plug trust. This renders it 
possible, therefore, to make a comparison which could not be 
made for the cigarette and little dgar branches, — a comparison 
of the prices immediately before and after the organization of 
the trust The plug trust (the Continental Tobacco Company) 
controlled 56.3 per cent of the business in 1899, and gradually 
increased this control to 81.8 per cent in 1906. The relation 
between steadily increasing monopolistic control and prices can 
thus also be pointed out. 
The essential figures are shown in the following table: 

Wholesale Prices of Plug Tobacco Received by the Trust, 

1893-1910 ^ 




Average per pound 


Net price 


Net price 
less tax 




















1910. . . . 





no. 8 










154 6 









35 4 







































21. 1 









* 2.9 





* Report on the Tobax:co Industry, part III, p. 51. 

* Includes manufacturing, selling, advertising, and freight. 


In 1894, when there was no important concentration of the 
plug business in the hands of any one concern, the net price less 
tax averaged 29.1 cents per pound. The inauguration by the 
American Tobacco Company of its campaign for the plug busi- 
ness led to severe cuts in prices. The existence and severity of 
this competition is shown by the figures for 1895 to 1898. The 
average price per pound fell from 29.1 cents in 1894 to 15.5 cents 
u^ 1895, to 12.9 cents in 1896, and to 12.2 cents in 1897. In the 
spring of 1898 an agreement looking toward consolidation was 
reached, and largely as a result the average price for 1898 rose 
to 16.7 cents per poimd, — quite a bit higher than in 1897. In 
1899, the year of the acquisition of the Liggett and Myers con- 
cern, the price rose to 21.0 cents, and in 1900 to 22.8 cents. As 
the trust increased its control year by year the price rose, and 
with it the profit. By 1901 the price had advanced to 25.1 cents, 
or more than double the price of 1897; and the profit was 6.5 
cents per poimd as compared with aloss of 2.4 cents in 1897. By 
1908 the high-water mark in prices was reached at 30.3 cents, 
the profit in that year being 8.0 cents per poimd. The Contin- 
ental Tobacco Company at this time controlled 81.9 per cent 
of the business. The year 1908 was not the year of maximimi 
profit, however, because the cost was higher than in 1903, whoi 
a profit of 9.8 cents per poimd was attained. 

The power and influence of the trust is indicated, though 
not proven, by the coiurse of prices during the years 1901 to 1903. 
The internal revenue tax on plug tobacco had been 12.0 cents 
per poimd in 1900. In 1901 it was reduced to 10.9 cents, in 1902 
to 7.8 cents, and in 1903 to 6.0 cents. In ^ite of these marked 
tax reductions, the net price (including tax) rose from 34.8 cents 
in 1900 to 36.0 cents in 1901, and by 1903 had declined to only 
35.4 cents. In other words, during a period when the tax was 
reduced by 6 cents, presumably in the interests of the consumer, 
the price actually increased six-tenths of one cent The cost of 
production during these years increased by exactly the same 
amount as the price. It is evident, therefore, that the consumer 
got no benefit from the reduction in the tax; and that he was 
forced to pay six-tenths of a cent more to compensate the trust 


for the increase in costs, — an increase which exactly equalled the 
rise in price. In view of these facts, the profits of the trust must 
have greatly increased. The profit per pound had been 3.8 cents 
in 1900; in 1903 it was 9.8 cents, or over 150 per cent greater. 

The remission of the internal revenue taxes on the other 
tobacco products during 1901 and 1902 had substantially the 
same result; the trust absorbed the gains (or practically all of 
them) that were presimiiably intended for the consimners of 

In 1910 the reverse situation appeared in part* In that year 
the internal revenue tax was increased somewhat all along the 
line, and this added burden was largely borne by the trust. 
While in the smoking and fine-cut branches prices were ad- 
vanced, these increases being passed along by the jobber to the 
consumer, in the cigarette, little dgar, plug, and snuflf branches, 
the trust advanced its price to the jobber but slightly, and the 
jobber absorbed the increase, leaving the price to the consumer 
imchanged.^ The trust might have reduced the quantities of 
these products in the retail packages^ as it did in the smoking 
tobacco and fine-cut branches, but this would generally have 
doubled the profits, — a step that did not seem advisable, 
e^)edally in view of the pending dissolution suit. 

Similar price statistics are available for smoking tobacco, 
snuffy and dgars. However, it would burden the record imduly 
to insert them here. Yet a comparison of the snuff and dgar 
businesses with re^)ect to thdr profits is of great significance. Of 
all the branches of the tobacco industry, the snuff branch is the 
most highly monopolized, while the dgar branch is the only one 
the trust has been unable to dominate. The table on page 160 
shows for the trust in these two lines the percentage of the price 
which represented profits (not the profit per pound or per 

During the years 1901-1910, from 54.1 per cent to 73.7 per 
cent of the price of snuff stood for cost, and from 45.9 per cent to 
26.3 per cent represented profit. For cigars (leaving out of con. 

> Rqx>rt on the Tobacco Industry, part ni, p. 7. 
* Ibid., pp. 142, 199. 


Rate of Profit (percentage that profit was of the price) on Snuff 

AND Domestic Cigars, 1900-19 io 



cigars ^ 

















44 9 

II. 2 ' 




3 9 


sideration the years 1 901-1904, when the tobacco trust was 
trying to capture the cigar business) the cost of manufacture 
ranged from 89.3 per cent to 96.1 per cent of the price, and the 
profit, therefore, ranged from 3.9 per cent to 10.7 per cent of 
the price. If we take the year 1906 (when the profits in the 
cigar branch were greatest), it appears that the rate of profit in 
the highly monopx)lized snuff business exceeded the rate of profit 
in the competitive cigar industry by well over four times. A 
similar comparison made for the other branches would show that 
the trust's rate of profit in the cigarette, plug, smoking tobacco, 
and little cigar business exceeded its rate of profit in the domestic 
cigar business by three, three, two and a half, and two times, 
respectively.' It is also significant that the cigar branch was 
the only one in which the price, either with or without tax, 
showed a declining tendency during the ten years ending in 191a 
The net price less tax on the trust's domestic cigars averaged 
$27.83 per thousand in 1901, and only $24.50 in 1910. The bear- 
ing of these figures on the general question of monopoly versus 
competition is obvious. 

* Excludes stogies, cheroots, and package cigars. 


' Report on the Tobacco Industry, part TIT, p. 200. 


The price tables presented above are for wholesale prices, — 
the prices paid by jobbers. Th.e prices paid by consumers during 
this p>eriod did not increase in anything like the same proportion; 
in fact, during the period from 1901 to July, 1910, there were 
practically no changes in the retail prices of the trust's principal 
brands of cigarettes, little dgars, and manufactured tobacco.^ 
It follows, therefore, that dxiring this period the trust was 
gradually encroaching upon the margin between the jobber's 
and the consimier's price. In part this may be explained by the 
trust's policy of performing itself to a large extent the function 
of pushing the sale of its goods (thus reducing the jobbers* ex- 
penses and making it possible for them to get along on a lower 
margin). In part also it testified to the great power of the trust. 

We turn next to an analysis of the profits of the tobacco 
trust The table on page 162 shows for the American Tobacco 
Company the earnings and dividends on the common stock for 
the years 1890 to 1903 (in 1904 the American Tobacco Company 
and the Continental Tobacco Company were merged). 

The earnings of the American Tobacco Company have been 
handsome, and especially in the early years. The average for the 
nine years 1890 to 1898, embracing a period of severe industrial 
depression, was 17.7 per cent, not counting the profits realized 
from the sale of the plug business to the Continental Tobacco 
Company. If these are included, the earnings averaged as high 
as 25.7 per cent.^ The declaration of a 100 per cent stock divi- 
dend in 1899 natin-ally reduced the rate of earnings, yet in spite 
of this dilution. of the stock as much as 13.8 per cent was earned 
in 1903. 
I The dividends paid were also liberal. In the fourteen years 
' prior to the merger, the dividends declared on the common stock, 
including stock dividends and scrip, averaged about 15 per cent 
per annimi. This common stock was largely water. | At its organ- 
ization in 1890 the American Tobacco Company had issued $10,- 
000,000 preferred stock and $15,000,000 common. According to 
the Bureau of Corporations, the tangible assets of the five com- 

* Rqx)rt on the Tobacco Industry, part III, p. 7. 
« Ibid., part 11, p. 58. 


Eaknings and Dividends of American Tobacco Company on| 

Common Stock, 1890-1903 ^ 

Profits OMiUibU for distribu- 
tion on common stock after 
paying dividends on preferred 
stock and interest on scrip 


Common stock 



Rate of divi- 
dend paid on 
common stock 


2 1 ,000,000 













II. 4 


17. 8« 


13 8 










"""^O • • • • 



• '"^•r 


20. o* 















■■y"* 11* 







panics which united to form the trust aggregated $3,545,108, and 
the good will (which was recognized as a legitimate factor in the in- 
vestment, because it had generally been built up by large expendi- 
tures for advertising, etc.) certainly did not exceed $8,954,892.* 
As a very liberal estimate the value of the business (allowing for 
the $1 ,825,354 in notes given by the organizers) was only $14,325,- 
000, and property of this amoimt was represented by $10,000,- 
000 of 8 per cent preferred stock and by $15,000,000 of common 

^Original Petition in United States v. American Tobacco Company, 
pp. 78-84, and Report on the Tobacco Industiy, part II, p. 57. 

* Does not include the profits received from the sale of the plug business. 

' 9 per cent paid in cash; 20 per cent in scrip, afterward redeemed at its 
face value, with interest at 6 per cent from May i, 1896. 

* Includes 100 per cent stock dividend. 

* Report on the Tobacco Industiy, part 11, pp. 8-9. 


stock. Over two-thirds of the common, therefore, was water. 
Thus, the American Tobacco Company, though paying 10 per 
cent dividends in 1890, was actually paying at least 34 per cent 
on the value of that part' of its property which stood back of the 
conmion stock. The fact that it was able from the very start to 
pay excellent dividends on its whole capitalization indicates 
that a high degree of monopolistic control had been efiFected. 

Similar data might be presented in detail for the Continental 
Tobacco Company from 1899 to 1903; for the Consolidated 
Tobacco Company from 1901 to 1904; and for the reorganized 
American Tobacco Company from 1904 to 1908. It will suffice 
to point out that even on the capitalization basis the earnings of 
these companies and the dividends paid were very liberal. The 
reorganized American Tobacco Company, for example, earned on 
its conmion stock during the years 1905 to 1910 an average of 
over 50 per cent; and paid dividends averaging over 29 per cent.^ 

The foregoing statistics give a fairly satisfactory idea <rf the 
profits of the trust. But for two reasons they do not portray the 
situation accurately. In the first place, the capitalization was an 
arbitrary figure; and, in the second place, the earnings were not 
the actual earnings, but merely those shown on the companies' 
books. The Bureau of Corporations therefore attempted in its 
elaborate investigation of the profits of the tobacco business to 
ascertain as acciuately as it could the investment and the actual 
earnings, — that is, to determine what the money invested in the 
tobacco manufacture had really earned. Space is not available 
to present the results of this study; ^ it must suffice to say that 
after 1901, by which date effective control had been secured over 
practically all branches of the tobacco industry, the earnings of 
the tobacco trust on its entire business closely approximated the 
large profits obtained by the American Tobacco Company dur- 
ing the earlier period when it almost completely monopolized the 
cigarette business. 

^ Moody's Manual, 191 1, p. 2696. No dividends were paid in 1904, the 
year in whidi the American Tobacco Company was organized. 

*The interested reader is referred to Report on the Tobacco Industry, 
part n (Capitalization, Investment, and Earnings). 



Practically all of the shoes now made in this country are manu- 
factured by machinery. In 1915 there were over 1,500 manufac- 
turers of shoes scattered throughout the country, producing 
annually in the aggregate more than 300,000,000 pairs of machine- 
made shoes. A very important group of these machines is that 
used to prepare and attach the soles to the uppers, — a process 
known in the trade as bottoming. The more important of the 
bottoming machines, without which factory shoes can not profit- 
ably be made, are the lasting machines^ the welt-Sfi3Kinglnadiiii^> 
the outsole-stitching machines, THe heeling m^chifles, and the 
metallic-fastening machines.^ By the year 1899, throughapcoc- 
§55 ofjcpmbination, there had developed a dominating concern 
in the manufacture of each one of these groups of machines. The 
Consplidat ed an d McKay Lasting Machine Company under 
letters patent manufactured 60 per cent of the lasting ma- 
chines made in this country ; the Goodyear Shoe Machinery Com- 
pany produced 80 per cent of the outsole-stitching machines, 
and 10 per cent of the lasting machines; and the McKay Sho e 
Machinery Company made 70 per cent of the heeling ma- 
chines, and 80 per cent of the metallic-fastening machines.* 

' On the United Shoe Machinery Company see: Original Petition in United 
States V. United Shoe Machinery Company in the district court of the 
United States for the eastern district of Missouri; Brief for the United States 
in United States v. United Shoe Machinery Company (no. 207); 227 U. S. 
202-218; 222 Fed. Rep. 349-415; 247 U. S. 32-91; 264 Fed. Rep. 138-175; 
Report of the Senate Committee on Interstate Commerce on the Control of 
Corporations, 1913; Hearings on Trust I.«egislation held before the House 
Committee on the Judiciary, 1913-T914; Roe, Journal of Political Economy, 
21, pp. 938-953, and 22, pp. 43-63- 

' For a description of (hese machines and of the process of shoe manufac- 
ture, see Brief for the United States (no. 207), pp. 7-15. 

' See 227 U. S. 215. Mr. Winslow, president of the United Shoe Machin- 




The heads of the Consolidated Company and the Goodyear Com- 
pany in negotiations begun in 1898 discussed a "working agree- 
ment" between the two companies, but this proposed arrange- 
ment was given up because of the objections of the head of the 
Goodyear Company. This gentleman, who was a lawyer, " had 
a sort of indefinite idea that it might be deemed to be a combina- 
tion in restraint of trade," and he therefore insisted upon a com- 
plete consolidation, the illegality of which (as a device for organ- 
izing trusts) was less certain at that time.^ 

Accordingly on February 7,1899, the United Shoe Machinery 
Company was incorporated in New Jersey with an authorized 
capital stock of $25,000,000. The new company acquired all the 
stock of the three concerns mentioned above,. as well as four 
other concerns, to wit, the International Goodyear Shoe Ma- 
chinery Company, the Davey Pegging Machine Company, the 
Eppler Welt Machine Company, and the International Eppler 
Welt Machine Company.^ These companies conveyed to the 
United Company all of their business, including their patent 
rights in the United States and foreign countries.^ The United 
Company thus became an operating concern. It soon concen- 
trated the manufacture of its machines at a new plant in Beverly, 
Massachusetts; and here the greater number of its machines 
are now made. The effect of the combination of 1899, accord- 
mg to counsel for the government, was to give one concern con- 
trol over 70 to 80 per cent of the total output of bottoming room 
machinery (the company, it should be noted, did not secure 
control of the machinery used in the sole leather room, the 
stitching room, or the finishing room).^ After its organization 
the United Company acquired some fifty other concerns manu- 
facturing shoe machinery or supplies.^ As the result of the 
original combination and subsequent acquisitions the United 
Company obtained a complete line of the principal and auxiliary 

cry Company, testified that the McKay Shoe Machinery Company produced 
nearly all of the heeling and metallic-fastening machines that were being 
made in the United States. 247 U. S. 81. 

* 247 U. S. 77. 

*Ibid., 38-39. * 227 U. S. 205. 

'Ibid., 39. • Brief for the United States (no. 207), p. 67. 


machines used in the bottommg of shoes. Formerly, as stated 
above, certain companies had held a monopolistic position with 
respect to individual bottoming room machines, but no one 
had a full line, and no one has a full line at the present time, 
except the United Shoe Machinery Company.^ 

Not only is the United Company the only American concern 
possessing a full line, but it has a highly monopolistic position in 
the manufacture of the leading bottoming room machines, — and 
it is with respect to bottoming room machinery that the contro- 
versy of the government with the United Company deals. In 
the Brief for the United States there is an exhibit that shows 
the number of principal bottoming machines (together with 
clicking machines) which the United Company and its competi- 
tors had out on March i, 1911.^ This exhibit is reproduced be- 
low, the percentages being supplied by the author. 

Machines put out to Shoe Manufacturers in the United States, 

March i, 191 i 

Per cent of 

Machines By defendants By all others competition 

Clicking machines 3,65s none 0.00 

Pulling-over machines 1,632 none 0.00 

Lasting machines ' 7496 7 o.oi 

Standard screw machines ' 409 none 0.00 

Pegging machines • 146 none 0.00 

Tacking machines • 3^88 6 0.02 

Welt-sewing machines • 2,527 142 5 .30 

Outsole-stitching machines ' 2,676 758 22.07 

Loose-nailing machines * 1,835 24 i .30 

Heeling machines • 2,019 17 0.83 

Slugging machines 1,876 23 i . 21 

McKay sewing machines 898 8 0.87 

28,657 98s 3.44 

* Brief for the United States (no. 207), p. 134. 

* This table was constructed from the uncontradicted evidence of eighty- 
five witnesses, from an exhibit of the United Company, and from other 
sources. See Brief for the United States (no. 207), p. 150. 

' The figures for these machines are reproduced in the (pinion of Justice 
Oai^e (247 U. S. 89), who states that they are not seriously disputed by 
counsel for the United Shoe Machinery Company. 


From this table it appears that in only one bottoming room 
machine — the outsole-stitching machine — did the United Shoe 
Machinery Company have important competition. The inde- 
pendent companies made (1911} 22.07 P^^ ^^^^ ^^ ^^ outsole- 
stitching machines; and the United Company made 77.93 per 
cent. Of every other machine the United Company made at 
least 94 per cent, and in some cases 100 per cent. Taking all 
these machines together the trust made 96.56. per cent. The 
petition of the government even charged that the United Com- 
pany made gS}4 per cent of the machinery and supplies used in 
the bottoming of shoes.^ 

In addition the shoe machinery trust had a very strong hold 
on the business of foreign countries.^ The British United Shoe 
Machinery Company supplied all of the installed shoe machinery 
equipment in Ireland, practically all in Scotland, and some So 
per cent in England. Other affiliated companies furnished 90 
per cent of the shoe machinery equipment of Italian factories, 
and 75 per cent of that of French factories. United machines 
were sold also in Germany, Austria, Belgium, Russia, Denmark, 
Norway, Sweden, Spain, Switzerland, and undoubtedly other 

To what may be the ability of the United Shoe Machinery 
CcHnpany to attain a monopolistic position in the industry be 
attributed? It can not be ascribed to tariff barriers. There 
have been duties on the importation of shoe machinery (though 
none since 1913), yet the ability of the United Company to com- 
pete so effectively in foreign lands shows conclusively that its 
strong position at home is not to be explained in this way. 
Neither does it appear to have benefited by railway favors. 
Furthermore, no monopoly of a natural resource has been 
effected. To what, then, may it be attributed? 

In the first place, the stren gth of the shoe machinery trust 
was due to the original act of combination in 1899. The mere 

* Original Petition in United States v. United Shoe Machinery Company, 
pp. 15-16. 

* See the Shoe and Leather Trade series of the Department of Conunerce 
and Labor, 1912-19x3. 


union under one management of a group of concerns, each of 
which had a dominant position in its special line of bottoming 
room machinery, gave the United Company a substantial 
monopoly of all such machinery. A vital question is the proper 
public policy to be adopted with respect to such combinations. 
In this connection the remarks of the Supreme Court are of 
interest. Speaking of the organization of the United Shoe 
Machinery Company in 1899 it said: "On ^e face of it the cg n- 
bination was simply an effort after jpeater effici ency. The busi- 
ness of the several groups that combined, as it existed before the 
combination, is assumed to have been legal. The machines are 
patented, making them a monopoly in any case . . . and it 
may be assumed that the success of the several groups was due 
to their patents having been the best. As, by the interpretation 
of the indictment below, 195 Fed. Rep. 591, and by the admis- 
sion in argument before us, they did not compete with one 
another, it is hard to see why the collective business should be 
any worse than its component parts.* It is said that from sev- 
enty to eighty per cent, of all the shoe machinery business was 
put into a single hand. This is inaccurate, since the machines in 
question are not alleged to be types of all the machines used in 
making shoes, and since the defendants' share in commerce 
among the States does not appear. But taking it as true we can 
see no greater objection to one corporation manufacturing sev- 
enty per cent, of three noncompeting groups of patented ma- 
chines collectively used for making a single product than to three 

^ In this case the Supreme Court did not find that the companies combined 
were noncompeting; it merely accepted the construction put on the indict- 
ment by the lower court. But in 247 U. S. 41, 47, the Court (four judges) did 
assert that the companies that united to form the United Shoe Machinery 
Company were not competitive. However, the dissenting opinion (three 
judges) declared that some of the companies were competitive, and intro- 
duced testimony of the leading officials of the company that substantiated 
this contention (247 U. S. 82-83). The matter is highly important smce the 
decision of the Supreme Court turned on this point. By the majority opinion 
the United Shoe Machinery Company was declared to be in essence a union 
of several patent monopolies, which was not forbidden by the Sherman Act, 
For a discussion of the decisions of the Supreme Court, see pp. 431, 4^2. 


corporations making the same proportion of one group each. 
The disintegration aimed at by the statute does not extend to 
reducing all manufacture to isolated units of the lowest degree. 
It is as lawful for one corporation to make every part of a steam 
engine and to put the machine together as it would be for one to 
make the boilers and another to make the wheels." ^ 

The law is thus clear. The United Shoe Machinery Company 
combined in 1899 a number of noncompeting concerns, and es- 
tablished a monopoly of a very important line of shoe machinery. 
But the patent law contemplates and permits monopoly, hence 
the act of combination was not illegal. In other word s we are 

deali ng he re^'tl^ a pa,^^"^ tniQt^ — g trust .AiippnrfrpH hy Ipgjgla- 

tion. Without criticizing the principle of our patent legislation 
it must be clear that the existence and power of the United Shoe 
Machinery Company does not necessarily lend support to the 
argument that trusts inevitably evolve because of their superior 
efficiency. The United Shoe Machinery Company would appear 
to have evolved because a monopoly was profitable, and sanc- 
tioned by law. 

As to the economics of the matter, there are, as a matter of 
course, more or less plausible argimients advanced for a shoe 
machinery trust protected by patents (as there are for every 
other trust), as, for example, the following: "Shoe manu- 
facturing had become a highly complicated industry. In 
making Goodyear welt-shoes, one hundred and eighty-five 
distinct operations were necessary, of which one hundred and 
fifty-seven were machine operations. Few machines could per- 
form more than one or two of these operations. In every shoe 
factory, therefore, a great many different machines had to be 
assembled, adjusted to work in absolute harmony, and kept in 
perfect operation. If any machine broke down or got out of 
adjustment, the industrial chain was broken, and all the machin- 
ery in the factory had to stand idle until the broken link was 
restored. The shoe mamufacturer, consequently, was always 
at the mercy"3his weakest machine. His product was always 

* 227 U. S. 217-218. The validity of the leases with their tying clauses 
(see pp. 171 ff.) was not before the court in this case. 


limited by the delay and inadequacy of the service furnished by 
the weakest manufacturer from whom he obtained machinery. 
Every other machinery manufacturer, whose machines were 
prevented from earning royalties during this enforced idleness, 
was also a sufiferer. He, no less than his customer, was always at 
the mercy of the weakest machines in his customer's factory. 
His royalties from his machines were alwa}^ limited by the delay 
and inadequacy of the service which his competitor furnished to 
their conmion customer. 

"Such instability could not endure. Breakdowns multiplied; 
repair bills became intolerable; continuous operation was never 
certain; production costs could never be predicted; promises of 
definite deliveries could not be fulfilled; machines bought out- 
right soon became worthless; large customers demanded and 
frequently obtained rebates over their smaller competitors; 
enforced idleness caused by inefiScient machinery service re- 
sulted in frequent turmoils of factory operatives; an up-to-date 
shoe factory involved such large, unforeseeable outlajrs as to 
become almost a financial impossibility." ^ 

However accounted for, it gradually came about that the mak- 
ing of machinery for the bottoming operations in shoe manufac- 
ture centered in three noncompeting groups. The movement 
might have stopped there. The concentration of the bottoming 
machinery in the hands of three concerns would have obviated 
many of the difficulties referred to above, as it would naturally 
have been to the decided interest of each of these concerns to 
permit continuous use of their machines. But the movement 
went on, and in 1899, as we have seen, the three groups united 
to form the United Shoe Machinery Company. The forma- 
tion of this company was legal, and, according to the Supreme 
Court, " on the face of it simply an effort after greater efficiency." 
Probably efficiency would have been equally promoted, and the 
public interest better protected, by the existence side by side of 
several concerns, each making a full line of bottoming machinery, 
though one must not speak too dogmatically on the basis of 

* Roe, Journal of Political Economy, 21, pp. 941-^2. For the opposing 
view see Brief for the United States (no. 207), pp. 226-229. 


present knowledge. Furthermore, it would be quite possible, 
if public opinion is opposed to patent trusts, to have the 
federal government acquire the patent rights on its own accoimt, 
and throw open the invention to general use, due compensation 
being made to the inventor to reward him for his labor and finan- 
cial outlays. While invention will be stimulated and industrial 
progress promoted by proper encouragement in a financial way 
to inventors, it is by no means certain that that encouragement 
could not be given without permitting at the same time the 
establishment of patent monopolies.^ If then it appeared that 
it were more efficient for all the machinery in a given shoe fac- 
tory to be owned by one company, it would still be possible for 
individual manufacturers to lease all their machinery from one 
company, with the alternative, however, of turning to other 
manufacturers upon the expiration of the leases, in the event 
that the service was not satisfactory. By this arrangement the 
government would hold the patents, and active competition in 
the business of manufacturing shoe machinery and supplying 
shoe machinery service would be possible, as it is not now, be- 
cause of the fact that many of the essential patents are owned 
by one company. 

In the second place, the strength of the United Shoe Machin- 
ery Coii^pany was the result of the so-called tying clauses in its 
leases. iThe United Company did not sell its principal machines; 
it merely leased them to shoe manufacturers at a royalty of so 
much per pair of shoes. The provisions of the leases are very 
important, and deserve detailed consideration. For this purpose 
we shall take the leases for lasting machines, — one of the essen- 
tial machines. 

Hie principal provisions of the lasting machine leases are (in 
substance and condensed form) : ^ 

Sec. I. The leased machinery shall at all times remain the 

^ It should be realized that a monopoly in shoe machinery of certain types 
is Ukely to discourage invention, since there will be no competition for the 
product of the inventor, and his reward will therefore be limited. 

* A copy of a lasting machine lease is in the Report of the Senate Commit- 
tee on the Control of Corporations, pp. 31 70-21 74. 


exclusive property of the lessor (the United Company). The 
lessor and its agents and employees shall at all times be given 
access to the leased machinery for the purpose of inspecting it, 
watching its operation, repairing it, or determining the extent of 
its use. 

Sec. 2. The lessee (the shoe manufacturer) shall at his own 
expense keep the leased machinery in good working order. He 
shall obtain from the lessor exclusively, and shall pay therefor 
at the regular prices from time to time established by the lessor,^ 
all the duplicate parts and extras needed in operating or repairing 
the leased machinery. 

Sec. 5. The leased machinery shall be used for no other pur- 
pose than for lasting shoes or other footwear made by or for the 
lessee. The leased machinery shall not, nor shall any part 
thereof, be used in the manufacture of any welted shoes or other 
footwear, or portions thereof, which have been or shall be welted 
in whole or in part, or the soles of which have been stitched, by 
the aid of any welt-sewing or sole-stitching machinery not held 
by the lessee under lease from the lessor; or in the manufacture 
of any turned shoes or other footwear or portions thereof, the 
soles of which have been or shall be in whole or in part attached 
to their uppers by the aid of any turn-sewing machinery not 
held by the lessee under lease from the lessor; or in the manu- 
facture of any shoes or other footwear which have or shall be in 
whole or in part pulled over, slugged, heel seat nailed, or other- 
wise partly made by the aid of any pulling-over or "Metallic" 
machinery not held by the lessee under lease from the lessor. 
Subject to the foregoing limitations, the lessee shall use the 
leased machinery to its full capacity upon all shoes or other foot- 
wear, or portions thereof, made by or for the lessee in the manu- 
facture of which such machinery is capable of being used. 

Sec. 6. The lessee shall pay to the lessor as royalty the sum of 
I 1/4 cents for each pair of shoes or portion thereof lasted by the 
aid of the leased machinery. 

Sec. 8. If at any time the lessee shall fail or cease to use 
exclusively * lasting machinery held by him under lease from the 
* Italics supplied by the author. ' Ibid. 


lessor for lasting all shoes m^de by him or for him which are 
lasted by the aid of machinery, the lessor may at its option ter- 
minate forthwith, by notice in writing, any or all leases of lasting 
machines 'then existing between the lessor and the lessee; and 
the possession of the lasting machine shall thereupon be revested 
in the lessor free from any claims whatever. 

Sec. 9. This lease shall continue, unless sooner terminated by 
the lessor because of breach thereof on the part of the lessee, for 
seventeen years. But if any breach shall be made in the observ- 
ance of any one or more of the conditions contained herein or 
contained in any other lease subsisting between the lessor and 
the lessee, the lessor shall have the right, by notice in writing 
to the lessee, to terminate forthwith any or all ^ leases to use 
machinery then in force between the lessor and the lessee. Upon 
the expiration of this lease or its termination by notice, the lessee 
shall forthwith deliver the leased machinery to the lessor at 
Beverly, Massachusetts, in good order; and shall thereupon 
pay to the lessor the simi of $150 in respect to each lasting 
machine hereby leased, as partial reimbursement for deteriora- 
tion of the leased machinery. 

Sec. 10. In case at any time the lessee shall have in his posses- 
sion more lasting machines than, in the opinion of the lessor, are 
needed to perform the work which the lessee has for such ma- 
chines, the lessor may, upon thirty days* notice in writing, termi- 
nate the lease to use any one or more of the lasting machines 
hereby leased. In case any lease is thus terminated, the lessee 
shall pay to the lessor such simi as may be necessary to put such 
machine or machines in suitable condition to lease to another lessee. 

Sec. 13. The lessee admits the validity for the full term ex- 
pressed in the grant thereof of each of the Letters Patent of the 
United States owned by the lessor. 

The provisions of this lease bear witness to the power of the 
United Shoe Machinery Company. Shoe manufacturers would 
hardly have submitted to such conditions had it not been largely 
a matter of necessity. It should be borne in mind, however, 
that it is not the leasing system itself that is the subject of com- 

^ Italics supplied by the author. 


plaint; rather it is the t3dng clauses contained in the leases. 
The leasing system, in fact, possesses distinct advantages, partic- 
ularly to the manufacturer of shoes operating on a compara- 
tively small scale. Were it necessary for a shoe maniffacturer to 
buy his shoe machinery, it would require considerable capital to 
engage in the business. As it is, the machines, with all that is 
involved in the way of invention costs, depreciation, care of 
machines, cost of administration, are supplied to the shoe 
manufacturer at a comparatively small royalty per pair of 
shoes. The evidence is that the United Company has given the 
same terms and the same service to every shoe manuf actiu^r, no 
matter whether he was doing business on a large scale or on a 
small scale; that a larger capital has never availed to secure any 
favoritism with respect to machines and machine service.^ As 
the result of this policy competition has continued quite active in 
the shoe industry. 

Since it is not the practice of leasing machinery that is com- 
plained of, but rather the tying clauses in the leases, it will be 
advisable to consider more fully the nature of these tying clauses 
and their significance. 

According to section five of the lasting machine lease described 
above a shoe manufacturer leasing a lasting machine from the 
United Shoe Machinery Company obligated himself not to use 
that machine in the manufacture of shoes which have been or 
shall be welted in whole or in part with the aid of any wdt-sew- 
ing machinery not held by the manufacturer imder lease from 
the United Company; nor in the manufacture of shoes, the soles 
of which have been in whole or in part stitched with the aid of 
sole-stitching machinery not leased from the United Company; 
nor in the manufacture of turned shoes, the soles of which have 
been or shall be in whole or in part attached to their uppers with 
the aid of any tiun-sewing machinery not leased from the United 
Company; nor in the manufacture of shoes which have been or 
shall be in whole or in part pulled over, slugged, or heel seat 
nailed with the aid of any machinery not leased from the United 

* Report of the Senate Committee on Control of Corporations, pp. 1160, 
1964, 2159. 


Company. The crux of the whole matter is that the shoe 
manufacturer had to have a lasting machine; for all practi- 
cal purposes he could get one only from the United Shoe Ma- 
chinery Company; ^ and if he leased one from the company — it 
would not sell him one under any circumstances — he had to agree 
to use certain other machines of the company, notably the 
welter, stitcher, and metallic-fastening machines. That is, to 
the essential machines, like the laster, other machines were 
tied. These other machines might not be as good as those of 
competing shoe machinery manufacturers — it is not intended, of 
course, to say that they were not — ^but if the shoe manufacturer 
wished to use a laster he had but little choice. This, in effect, re- 
strained him in the use of competing shoe machinery. The gov- 
ernment in its petition asking that the court declare these tying 
dauses ill^al under the Clayton Act ^ charged that competitors 
of the United Company were prepared to supply certain kinds of 
shoe machinery at lower prices or royalties than were asked by 
the United Company, but that the shoe manufacturers were de- 
terred from buying or leasing them by the tying clauses, and by 
the fear of the serious financial consequences that would attend 
their violation.^ Competition in the manufacture of shoe ma- 
chinery was thus rendered largely impotent by the tying clauses. 
Coimsel for the United Shoe Machinery Company has stated 
the theory of the tying clauses: "The fimdamental machines are 

'President Winslow testified that "after the formation of the United 
Company it was manufacturing every single lasting machine that was 
being put out in the United States except the Seaver machine; and in 1900 we 
acquired the Seaver Company" (247 U. S. 81). At the time of the govern- 
ment suit only one other concern — the R. H. Long Machinery Company — 
professed to put out lasting machines. Yet this company had put out only 
four, and it was by no means in a position to supply all the requisite types of 
lasting machines. That being the case it could not become a competitor of 
any consequence, since all of the United Company lasting machine leases 
cootained an exclusive use clause, which required the shoe manufacturer to 
obtain all of his lasting machinery from the United Company. Brief for the 
United States (no. 207), pp. 177-178. 

•Sec p. 476. 

* Oii^nal Petition in United States v. United Shoe Machinery Company, 
p. 12. 



the stitcher and welter, which attach the upper to the inner sole 
and the outer sole to the welt. To those fundamental machines 
other machines are tied. A man can have a stitcher and a welter 
and not be required to take a single other machine, and he can 
acquire by purchase a great number of other machines without 
being required to take a stitcher or a welter. But if he takes a 
stitcher and a welter and also wants to take a lasting machine 
he is required to use that lasting machine only on shoes which 
are stitched and welted on the company's stitcher and welter." ^ 
According to counsel a shoe manufacturer could have a stitcher 
and welter, and need take no other machine.* But he had to 

have a lasting machine, and if he took one — as he must if he is to 


manufacture shoes — ^he was required in effect to use not only the 
company's stitcher and welter, but a number of other machines, 
none of which might be used except in connection with the 
company's lasting machines. The privilege, therefore, of xising 
the company's stitcher and welter and no other machine was 
thus a hollow one. 

It is important to note that through these tying clauses the 
period of patent protection has in effect been extended beyond 
the time set by law. A machine on which the patent has ex- 
pired can be tied to an essential machine on which the patent 
has not expired. Mr. Charles H. Jones testified that his com- 
pany was paying at least $25,000 a year royalty on machines, 
the important patents on which had already expired.' It would 
appear that so long as the tying clauses are in force, the time 
may never come when shoe manufacturers will be free to secure 
their bottoming machinery where they choose. In other words, 
potential comp)etition may hardly be said to exist in this industry. 

The attitude of the shoe manufacturers generally appears to be 
one of opposition to the tying clauses. The Shoe Manufacturers' 
Alliance, comprising manufacturers producing about 40 per cent 
of all the shoes produced in this country, adopted resolutions in 

^ Report of the Senate Committee on Control of Corporations, p. 2166. 
* The lessee of a welter may not use a competing stitcher and vice versa. 
Brief for the United States (no. 207), p. 182. 
' Report of the Senate Committee on Control of Corporations, p. 2271. 


191 1 urging the removal of the tying clauses and the restoration 
of competitive conditions in the shoe machinery industry.* The 
Shoe Manufacturers' Association of Brockton, one of the shoe 
centers of New England, passed a resolution in 191 1 that the 
association place itself on record as being in favor of a continu- 
ance of the lease system of the United Company, provided 
such portions of the leases as operated to exclude the use of 
competitive machines were abolished, and provided the penalty 
or charges for returning used machinery were modified or wiped 
out.^ This association represented at least 10 per cent of 
the shoe manufacturers of the country. Mr. Charles H. Jones, a 
prominent shoe manufacturer in Boston, testified as follows be- 
fore a Senate investigating conmiittee : " I believe I am well within 
the fact when I say there are not a dozen men in the United 
States engaged in the manufactxure of shoes who do not beUeve 
this tying clause should be stricken out. They like some of the 
featwes of the leasing system very much, but all agree that these 
things are repugnant to common sense and good business prac- 
tice." » 

— in 1907 the state of Massachusetts passed a bill to make the 
tying clauses illegal. The act provided in substance that no 
person, firm, or corporation should make it a condition of the sale 
or lease of any tool, appliance, or machinery, that the purchaser 
or lessee thereof should not buy, lease, or use machinery, tools, 
appliances, material or merchandise, of any person, firm, or cor- 
poration other than such vendor or lessor; but this provision 
should not impair the right, if any, of the vendor or lessor of any 
tool, appliance, or machinery protected by a lawful patent right 
vested in such vendor or lessor to require by virtue of such pat- 
ent right the vendee or lessee to purchase or lease from such ven- 
dor or lessor such component parts of said tool, appliance, or 
machinery, as the vendee or lessee might thereafter require dur- 
ing the continuance of such patent right: Provided, that nothing 
in the act should be construed to prohibit the appointment of 
sales agents to sell or lease machinery, etc.'* 

* Report of the Senate Committee on Control of Coiporations, p. 2266. 
*Ibi(L, p. 2121. 'Ibid., p. 2263. * Acts of 1907, ch. 469. 


Thereupon the United Company attached to all its leases a 
rider providing that "any and all agreements, stipulations, pro- 
visions, and conditions hereinbefore printed in this instrument 
which are in violation of the provisions of Chapter 469 of the 
Acts of the General Court of Massachusetts for the year 1907, if 
there are any such, are hereby stricken out before execution and 
are not agreed to nor made a part of this contract." ^ 
* — The Massachusetts legislation thus seems to have had but 
little effect. The right reserved to the United Company to can- 
cel all leases apparently deterred the shoe manufacturers from 
putting to the test their undoubted legal rights; for a manufac- 
turer who attempted to use in part only the essential machinery 
of the United Company ran the risk of ruin. 

In 1914, as part of the anti-trust legislation of that year, the 
federal government enacted a similar prohibition. This topic 
will be discussed in chapter XV. 

The United Shoe Machinery Company has laid a great deal 
of emphasis upon the excellence of its machines and of its serv- 
ice; and there can be no doubt that such excellence has been 
a great asset. Mr. McElwain, late president of the largest shoe 
concern in the country, said in a letter (191 2) : " We believe that 
the United Shoe Machinery Co. is in many respects rendering 
eflScient service to shoe manufacturers. . . . We have sufficient 
confidence in the strength of this company to believe that it will 
stand in the forefront of shoe machinery makers, even with the 
removal of the restrictions, which have been mentioned [the tying 
clauses]." ^ Its high efficiency was commented upon freely also 
by the Circuit Court before which the dissolution suit was tried.' 

Whether the existence of a shoe machinery trust promotes in- 
vention, however, is a disputed question. The United Company 
maintains a large corps of inventors, and, according to counsel 
for the company, has made distinct progress in invention. " The 
United Shoe Machinery Company has spent all the way from 
$250,000 to $750,000 in experiment and development of new 

* Journal of Political Economy, 21, pp. 945-946. 

2 Report of the Senate Committee on Control of Corporations, p. 2268. 

• 222 Fed. Rep. 372. 


machines every year since it was formed. It has made workable 
over 100 different new machines, some of which perform opera- 
tions formerly performed by hand and all of which are far better 
than those formerly in use. Taken in connection with reduction 
in royalties, shoe manufacturers by their use effect a saving of 
nearly 9 cents in the cost of making a pair of Goodyear welt 
shoes, or nearly double the royalty now paid. A greater number 
of practical patents in shoe machinery have been made effective 
in the past 12 years than in any other period of equal length since 
shoe-making began." ^ 

That the technical progress of the industry has been promoted 
by the United Company is denied by prominent shoe manufac- 
turers. A group of them instrumental in organizing the Shoe 
Manufactiu'ers' Alliance made the following statement: "At 
present [191 2] practically all of the essential machinery used in 
bottoming shoes in this country is owned by a single corporation, 
which is dominated practically by one man. This is a condition 
permitting the exercise of complete and arbitrary control of our 
businesses. It is contrary to the very spirit of liberty, and as 
such humiliating to us as shoe manufacturers. It also necessarily 
tends to retard and to restrict improvements in shoe machinery. 

" That it does so restrict development will be clear to those who 
ccmipare the progress of shoe machinery diuing the last 12 years 
with the advances made from year to year prior to that date. 
Shoe manufacturing in America is to-day efficient, and much of 
that efficiency is due to the extraordinary advances in shoe ma- 
chinery made prior to the organization of the Shoe Machinery 
Trust. Nearly every one of the 30 years prior to 1900 witnessed 
some marked advance in shoe machinery. That was a period of 
<^>en competition in the production of shoe machinery. Those 
who controlled the successful inventions reaped rich rewards. 
The activities of inventors and mechanics were stimulated, and 
the results were revolutionary in character. Wages increased, 
but the imit labor cost of producing shoes was being continually 
and substantially lowered. 

"Since 1900 the development in essential shoe machinery has 
* Roe, Journal of Political Economy, 22, p. 55. 


not been marked by any important invention materially reduc- 
ing the cost or improving the quality of work. Such new in- 
ventions as have been made are confined to details of minor 
consequence as compared with the advances made prior to the 
formation of the Shoe Machinery Trust. This check upon the 
development of essential shoe machinery is believed to be a nec- 
essary result of the formation of the combination. It has re- 
moved the stimulus of competition." ^ 

Mr. Charles H. Jones testified that it was the belief of men in 
the shoe business and in the shoe machinery business that the 
inventors of the United Company were allowed to work only 
along very narrow lines, and that they were not encouraged to 
develop original ideas.^ In fact, so he said, " it is directly against 
the interests of this company, in its machinery investments, to 
find revolutionary machines. They have got 90,000 machines, 
they claim, in the factories of the United States. These ma- 
chines are producing them an enormous revenue. What possible 
inducement would it be for them to throw out one, two, or three 
of those machines and put in something very much better? 
They could not get any more royalty. They would have a very 
large machinery cost, but there would be no additional return." ' 

That the United Shoe Machinery Company possessed no mo- 
nopoly of inventive genius is proven by the Plant episode.^ Mr. 
Thomas G. Plant, a shoe manufacturer at Roxbury, Massachu- 
setts, succeeded in inventing a set of bottoming machinery 
which, to say the least, had great experimental promise. The 
business of the shoe machinery trust, protected Us it was by 
patents, bade fair to be interfered with, when the whole outfit, 
including Mr. Plant's shoe factory, was purchased (1910) by the 
United Shoe Machinery Company for $6,000,000.^ 

' Report of the Senate Committee on Control of Corporations, pp. 3266- 

* Ibid., p. 2264. 

* Ibid., p. 21 17. 

* This episode is described in Brief for the United States (no. 207), pp. 105- 


* $3,000,000 in cash and the balance in stock of the United Company hav- 
ing a par value of $1 ,500,000, but a market value of $3,000,000. 247 U. S. 49. 


We will let Mr. Brandeis (now Justice of the Supreme Court) 
tell the story: 

" He [Mr. Plant] was a very successful shoe manufacturer — a 
remarkably successful man. His concern was earning five or six 
himdred thousand dollars a year. His business had been built 
up through his own efforts and with his brother's aid. With a 
few about him he displayed admirable business ability, govern- 
ing a business extending throughout the country. He undertook 
a task which was large, namely, of creating a competing shoe- 
machinery system, and it involved the expenditure of several 
million dollars — ^between three and four million dollars. Now, 
with Mr. Plant's shoe business and with these machines which he 
had developed into a successful system — declared by some of 
the best manufacturers of the country to be superior to the 
United's — ^he was in a position where he was entitled practically 
to any reasonable credit he might ask. The amount that he re- 
quired to carry him along was about $2,000,000. He had prop- 
erty that was worth four or five million dollars. His shoe busi- 
ness was one of the leading shoe businesses in the country, and 
yet after he had completed his machinery system; after he had 
demonstrated the success of it and gotten, the certificate of ap- 
proval from some of the best manufacturers of the country, east 
and west, his credit was cut oflF absolutely. Men who were dis- 
posed to give credit after a few days withdrew." 

"That was not accident. It was not the result of internal de- 
liberation upon the question. It was undoubtedly the result of 
that influence exercised directly and indirectly by the powerful 
organization to which he was opposed. As a matter of fact this 
Aoe machinery corporation is'a financial power as much as it is 
an industrial power. The managers of the shoe machinery cor- 
poration are practically the controlling influence in the First Na- 
tional Bank of Boston. They are a very large influence in our 
leading trust company, and have important influence in the Han- 
over National Bank and other banks of New York. It has been 
the steady policy of the United Shoe Machinery Corporation to 
keep at all times a huge cash balance which was deposited in 
those various banks, evidently not so much for current use in the 


business as for the financial control which they exercised through 
being large depositors in important banks .... I have very 
good evidence — absolutely reliable in my judgment — that one of 
the men who refused Mr. Plant credit, thought that his credit 
was perfectly good and was willing to give him the credit, but was 
not willing to oppose the important financial interests that in- 
.timated to him that they did not want him to have credit. .... 
You know how he happ)ened to sell out his business to the Shoe 
Machinery Trust. Mr. Plant was driven to the position where 
the next day he had to meet perhaps half a million dollars of obli- 
gations and he simply could not get any money. He had been 
driven to the last ditch. He had been trying to raise some money 
through an arrangement with western manufacturers. They 
were in Boston for that purpose. They were not quite ready to 
agree to advance the large sum of money needed. It was neces- 
sary to have about a million dollars to meet the situation. He left 
these western manufacturers at about 8 o'clock. Failure to 
meet his obligations stared Mr. Plant in the face. He then went 
to the office of the counsel of the Shoe Machinery Trust to see 
the members of that corporation, and between 8 that evening and 
5 o'clock the next morning the transaction was completed by 
which this wonderful comp)etitive machinery system was turned 
over to the shoe machinery corporation. The officers and counsel 
were in conference all night to complete the transaction which 
involved something like $5,000,000, enough to enable Mr. Plant 
to pay his debts and to remain a rich man." ^ 

Thus, said Mr. Brandeis, even in the ably managed United 
Shoe Machinery Company the inefficiency which is bred of mo- 
nopoly manifested itself.^ 

The charge of banking pressure has been denied by representa- 
tives of the company. The president in a letter to the Senate 
Committee before which Mr. Brandeis told his story wrote that 
"the United Shoe Machinery Co., or anyone connected with it, 
never did anything to injure Mr. Plant's credit at the bank or to 
in any way affect banks in regard to Mr. Plant." ^ Representa- 

* Report of the Senate Committee on Control of Corporations^ pp. 1188- 
1190. *Ibid., p. 1 161. 'Ibid., p. i960. 


tives of the company further charged that Mr. Plant^s inven- 
tions in their then existing form could not have been utilized to 
the best advantage by the trade, but combined with the inven- 
ti(His owned by the United Company and incorporated in its 
machines they would advance the art of shoe-making mate- 
rially.^ In fact — so they charged — Mr. Plant had no desire to 
supply the shoe manufacturers with machines; he had built up 
his line of machines to sell to the United Company.* Whatever 
may be the merits of this controversy, it is admitted by coimsel 
for the company that the improvements made by Mr. Plant 
were worth every cent that they cost the company; ' and it 
would appear to be proven, therefore, that the United Company, 
with all its corps of inventors, did not entirely take the place of 
independent endeavor in promoting the technical progress of 
the industry. 

TTie profits of the United Shoe Machinery Company come 
laigely, of course, from the royalties on the use of the leased ma- 
chines. The niunber of machines on lease in the United States 
on March 1,1911, was 90,276.^ According to the president of the 
OHnpany, the amounts paid per pair of shoes for the use of all 
the principal royalty machines f umished by the company for the 
manufacture of the different classes of shoes, when accounts 
were paid within thirty days, were substantially as follows: ^ 

Goodyear welts, men's work $0.05694 

Goodyear welts, women's work 04694 

Goodyear turn shoes, women's and misses' 01972 

Goodyear turn shoes, chiklren's 00500 

McKay shoes, men's and women's 01746 

McKay sewed shoes, children's 01391 

' Report of the Senate Committee on Control of Corporations, p. 1959. 
See on this point 247 U. S 50-51, 87-89. 

'Report of the Senate Committee on Control of Corporations, p. 2162. 
Judge Dodge of the Circuit Court declared this charge to be true. 222 
Fed, Rep. 376. 

'Report of the Senate Committee on Control of Corporations, 
p. 2162. 

^Arwual Report of the United Shoe Machinery Company, 191 1, 

p. 5. 

* Ibid., p. 7. 


From these royalties there should be deducted six-tenths of 
a cent per pair for men's Goodyear welts, forty-five one- 
hundredths of a cent per pair for women's Goodyear welts, and 
seventy-five one-hundredths of a cent per pair for women's and 
children's Goodyear turns; the foregoing sums to be invested in 
stock of the company, and given to lessees.^ This profit-sharing 
plan, presumably designed to secure the adhesion of the shoe 
manufacturers, was subsequently abandoned (191 2) because — 
so it was alleged — of the government dissolution suit filed in 
December, 191 1. 

The foregoing royalties, according to the president, covered 
substantially everything that the company received for the use 
of its principal machines from those manufacturers who used its 
machines in making Goodyear welt, Goodyear turn or McKay 
sewed shoes.^ In return for the royalties and rentals which it 
received, the company assumed the cost of invention, develop- 
ment, manufacture, and depreciation of machines; the care of 
the machines through its force of over 500 experts, who devoted 
their entire time to the service; the purchase of patents; and the 
cost of administration. According to the president, the only 
important item of cost in the manufacture of shoes which did not 
increase during the first twelve years after the company was 
formed was the item of machinery. 

The profits of the company have been very liberal. Up to 
1905, 6 per cent dividends were regularly paid on the preferred 
stock and 8 per cent on the pommon stock. In that year a re- 
organization was eflFected. For reasons not clear, a new com- 
pany — the United Shoe Machinery Corporation — ^was organized 
in May. to serve as a holding company. The Corporation offered 
to exchange its preferred stock at par plus i 1/2 per cent cash 
for the preferred stock of the United Shoe Machinery Company, 
and 150 per cent of its common stock plus 3 per cent cash for 
the common stock of the Company. This offer was generally 

* Annual Report of the United Shoe Machinery Company, iqh, p. 7. 

* A number of auxiliary machines could be used by the shoe manufacturer 
without payment of royalty, but upon payment of a nominal annual rental 
to cover the depredation of the machines. 


accepted, and the Corporation by 1915 held 98 1/2 per cent of 
all the stock of the Company} Upon the preferred stock of the 
Corporation 6 per cent has regularly been paid, and upon the 
common stock, including the 50 per cent addition, 8 per cent 
as before. In addition, the common stockholders have received 
numerous stock and extra caA dividends. In 1907 they re- 
ceived a 25 per cent stock dividend; in 1909 a 10 per cent stock 
dividend, and 2 per cent extra in cash; and in 1910 a 10 per cent 
stock dividend, and 4 per cent extra in cash. The total in 1910 
was thus 12 per cent in cash plus 10 per cent in stock. On the 
origmal common stock, which may have been heavily watered, 
this amoimted to quite a high figure. To be exact, it amounted 
to I18.15 cash on every $100 of common stock issued by the 
United Shoe Machinery in 1899, and counting the extra dividend 
in 1910 to $22.15 in cash. These are dividends only; the profits 
were mudi greater, as is evident from the large surplus built up. 
For example, during the three years ending March i, 1912, the 
net earnings aggregated $17,268,000; the dividends $9,344,000; 
and the surplus $7,924,000. 

' Moody's Manual, Industrial and Public Utility Section, 1916, p. 3690. 



With the early history of the iron and steel industry we 
are not concerned. Even as late as 1890 there were practi- 
cally no combinations of the modem type in the steel industry. 
To be sure, the Illinoi s Steel rnmnftny ir^i fiMfflPki b^d been 
organized in 1889 as a consolidatio n of three erstwh ile com- 
,petitive concerns, yef'slich cofnBmations were unusual. Jur- 
ing th e ea rly ninet ies, howeverTthe situation change d. The 
individuarjplants not only continued to expand in size, as during 
the eighties, but they became united in combinations. In 1891 
the Lackawanna Iron and Steel Company was incorporated, 
a consolidation of the Lackawanna Iron and Coal Company and 
the Scranton Steel Company. In 1892 the Colorado Fuel and 
Iron Company was organized to unite the Colorado Fuel Com- 

* On the United States Steel Corporation see: Report of the Commissioner 
of Corporations on the Steel Industry, part I, Organization, Investment, 
Profits, and Position of United States Steel Corporation Quly i, 191 1), 
part II, Cost of Production, Preliminary Report (January 22, 191 2), and 
part III, Cost of Production, Full Report (May 6, 1913); Brief for the United 
States, in two parts, in United States v. United States Steel Corporation 
(no. 6214); Brief for the United States, in two volumes, in United States v. 
United States Steel Corporation (no. 481); Brief for the United States Sted 
Corporation (no. 481); 223 Fed. Rep. 55-179; 251 U. S. 417-466; House 
Report no. 11 27, 62nd Cong., 2nd sess. (Stanley Committee Report); Report 
of the Senate Committee on Interstate Conmierce on the Control of Corpora- 
tions, 19 13; Industrial Commission, vol. I, pp.849-1039, and vol. XIII, pp. 
448-516; Berglund, The United States Steel Corporation; Wilgus, A Study 
of the United States Steel Corporation in its Industrial and Legal Aspects; 
Willoughby, Quarterly Journal of Economics, 16, pp. 94-115; Meade, Trust 
Finance, ch. 11; McVey, Yale Review, 7, pp. 302-318, and 8, pp. 156-172; 
Walker, Quarterly Journal of Economics, 20, pp. 353-398; Taussig, Some 
Aspects of the Tariff Question, chs. 9-10, 12-13; Dunbar, The Tin-Platc 



pany and the Colorado Coal and Iron Company.* In the same l/£"^^ 
year the Carnegie StefiLCompany (Ltd.), a partnership, wasf 
formed with a capital stock of $25,000,000. This concern, with / 
all its plants concentrated at Pittsburg, was then the largest in\ 
the industry. Yet it could hardly be considered a real combina- \ 
tion, since it represented for the most part simply a more binding j 
union of interests long affiliated. Other important concerns in 
the iron and steel industry in the early nineties were Jones and 
Laughlin; the Pennsylvania Steel Company, with its subsidiary, 
the Maryland Steel Company; the Tennessee Coal, Iron and 
Railroad Company; the Cambria Iron Company; and the 
Bethlehem Iron Company. 

Most of the^ab ove enumerated concerns were engaged chiefl y 
in the^j myluctiop of JM^mi-fi ni ched steel (billets, blooms and 
slabs), and of the simpler and heavier forms of ro lled steel prod - 
ucts^ such as rails, plates, and beams. The mitni^faf tnrt^ nf the 
hn-fcicr Tifrrl prodnrtfi ym(\ r^^^fntratpd j^ a considerable ex- 
te nt, even in the earlv nineties, in the hands o f a comparatively 
few producers. Thus the Carnegie Steel .Copipany, the Illinois- 
St€^rCOTipany, the Jones and LaughlinJnterests, the Lacka- 
wannaTron and Steel Company, the Pennsylvania Steel Com- 
pany, the Cambria Iron Company, and the Bethlehem Iron 
Company together turned out nearly half of the steel ingots 
produced in this country (steel ingots are the raw material from 
which nearly all steel products are made, but they are generally 
put through a further process of manufacture before being sold). 
But th ese comjm nies were entirely separate with respect to 
ownership, a](^<j ^n spife rf Jjif PYigrpnre qf pools of one kind or 
anrtther^were^Qiiifp active Com petitors.^ 

Save these companies producing the heavier steel products, 
there were comparatively few concerns of any considerable size 
in the iron and steel industry in the early nineties, and very few 

*Tbc Colorado Fuel and Iron Company at this time, however, had a 
greater interest in the coal trade than in the iron and steel business. 

'Report of the Commissioner of Corporations on the Steel Industry, 
part I, p. 65. Referred to hereafter as Report of the Commissioner of Cor- 


combinations. The Consolidated Steel and Wire Company, to 
be sure, was an important combination in the wire and nail 
business (1892), yet for the most part the manufacture of such 
products as nails, tin plate, and sheets was carried on by numer- 
ous concerns, many of them producing on a small scale. Com- 
petition in these lines was quite vigorous, except when restrained 
on occasion by pooling agreements. 

The situation was the same in the iron mining industry. 
While there were a few large concerns, such as the Minnesota 
Iron Company and the Lake Superior Consolidated Iron Mines, 
organized in 1882 and 1893, respectively, yet in jjeneral the 
ownershi p of the i ron ore mines was widely scattered; and 
thougTTthere were iron ore p^ls. competition ^as the chara cter-^ 
istic f eature of ^hf ]>^"g»»-n'^ 

In an other respect the steel industry of the early n ineties 
presented a marked contrast with the inHii<;trv gf to-cJay. "This 
was in the com parative absence of inteyratinn. — the practice of 
uniting under one control the successive stages in the manufac- 
ture of the finished products. There was some integration, to be 
sure. The Carnegie Steel Company, for example, through the 
Frick Ccike Company hfid ^^^^ Hppngifg of coking coal, and by 
the purchase in 1892 of a half-interest in the O liver Irop Minin g 
Company had provided itself with a supply of iron ore. But the 
production of the Oliver concern was quite inadequate to the 
needs of the Carnegie Company, and, moreover, Mr. Carnegie 
was understood to be opposed to the ownership of ore mines.* 
The business of mining iron ore, like the production of crude 
oil, was largely speculative; and Mr. Carnegie, like Mr. Rocke- 
feller, was willing that the risks be borne by those more specu- 
latively inclined. Other companies had integrated their business 
slightly, yet generally speaking it was true that the manufac- 
turers of finished products bought the semi-finished steel which 
constituted their raw material; the manufacturers of steel in 
turn bought their pig iron; and comparatively few iron and steel 
manufacturers possessed large iron ore deposits or iron ore 
railroads. The ^parate stages in the process of production 
* Report of the Commissioner of Corporations, part I, p. 68. 



wer e not at that time united under one management as at 

rom what has been said it is apparent that thej^^ling 
char acteristic of the iron and steel industry during the early and. 
middle nineties was its competitive character. It is true that 

agreements were quite common; indeed, there was hardly any 
branch of the iron and steel industry that was free from them. Yet 
the pools generally maintained but a precarious existence, and this 
was e^)ecially true of the less formal "gentlemen's agreements." 
In the latter part of the nineties, however, the situation 
underwent a marked change. In 1898 the combination move- 
ment struck the iron and steel industry, and by 1900 a large 
number of combinations had been formed. Some idea as to 
the extent of this movement is given by the following table, 
which sjiows the leading iron and steel combinations created 
during 1898 to 1900, with their authorized capitalization.^ 

Leiading Combinations in the Iron and Steel Industry, 1898-1900 
A. Combinations later united in the United States Steel Corporation 

Name and year of organizalion 

American Steel and Wire Co. of Illinois * . . . 

Federal Steel Co 

American Tin Plate Co 

American Steel and Wire Co. of New Jersey 

American Steel Hoop Co 

National Steel Co 

National Tube Co 


American Bridge Co 

American Sheet Steel Co 

Carnegie Co. of New Jersey 

Shelby Steel Tube Co 



% 24,000,000 









* Report of the Commissioner of Corporations, part I, pp. 80-81. 
*Thi5 company was merged in 1899 "*to the American Steel and Wire 
Co. of New Jersey. 


B. Combinations not subsequently united in the United States Steel 


Name and year of organization 


American Car and Foundry Co 

S 60.000.000 

American Iron and Steel Manufacturing Co 


Empire Steel and Iron Co 

National Enameling and Stamping Co 


Pressed Steel Car Co 

Republic Iron and Steel Co 

Sloss-Sheffield Steel and Iron Co 

United States Cast-Iron Pipe and Foundry Co 

Virginia Iron, Coal and Coke Co 

Crucible Steel Co. of America 





i I 

In addition to these combinations there were a number of 
others in the machinery trade or similar branches of the industry. 
Among them were the American Bicycle Company, capitalized 
at $30,000,000; the International Steam Pump Company 
($27,500,000); the United Shoe Machinery Company ($25,- 
000,000); the Otis Elevator Company ($11,000,000); and the 
American Radiator Company ($10,000,000). 

The first table shows the companies which subsequently 
united to form the United Stat^ Steel Corporation. A brief 
description of these companies will facilitate an understanding 
of the subsequent course of events. 

Carnegie Company of New Jersey. The leading concern 
in the iron and steel industry, without a doubt, was the Cam^e 
Company of New Jersey. This company was organized in 
March, 1900, being simply a reorganization of the Carnegie 
interests and of the H. C. Frick Coke Company (owning exten- 
sive coking coal properties in the Connellsville district of Penn- 
sylvania). It had an authorized capitalization of $320,000,000, 
half stock and half bonds. ^ All of its manufacturing properties 

* Not counting $25,081,813 of underlying indebtedness represented by 


were concentrated in the vicinity of Pittsburg, thus giving 
compactness to its organization. The Carnegie Company also 
derived strength from the fact that its size had been attained 
largely through intgrnal ex^nsion, rather than through the 
acquisition of competitors, the^purchase of the Duquesne works 
(1890) being the most important exception. The company 
was noted for its efficiency, its financial power, and its conserva- 
tive management. It had built up its property chiefljTout 
of earnings; its securities were not on the stock market; and its 
owners were actively engaged in the business. Among its more 
important subsidiary and allied concerns were the QU yer Iron 
Mining Company, the ore deposits of which, together with those 
secured by the lease of the properties of the Lake Superior 
Consolidated Iron Mines, assured the Carnegie Company an 
ample supply of good ore for a long time; the Pittsburg, Bessemer 
and La ke Erie Railroad, r unning from the Great Lakes to Pitts- 
burg, and used mainly for the transportation of iron ore; the 
Unio n Railroad Company^ operating an important belt line in 
the Pittsburg district; and various gas, water, and dock com- 

The ijijpf Miffini^? of the Carnegie Company was ^the_manu- 
facture of sgni- finished steel for tjie^lrade, and of heavy steel 
products, such as raols, plates, structural steel, bars, skelp, and 
bridge material. Its leading position is indicated in the fact that 
in 1900 it produced some 18 per cent of all the ingots produced in 
the coimtry, its nearest competitor producing only about 15 per 
cent^ The Carnegie Company did not make such finished 
products as wire, nails, tubes, tin plate, and sheet steel; it merely 
supplied the manufacturers of these finished products with 
the necessary crude steel. But it was, nevertheless, in a position 
to turn out these finished products itself on comparatively short 
notice, should its customers decide to produce their own crude 
steel, — a circumstance that later proved to be one of the imset- 
tling factors leading to the formation of the United States 
Steel Corporation. 

The Federal Steel Company. The largest competitor of 

* Report of the Commissioner of Corporations, part I, p. 87. 


the Carnegie Company was the Federal Steel Company, or- 
ganized in September, 1898. The Federal Steel Company was a 
consolidation of the Illinois Steel Company, with several steel 
plants in or near Chicago, and one at Milwaukee; the Lorain 
Steel Company, with a plant at Lorain, Ohio; the Johnson 
Company, with a plant at Johnstown, Pennsylvania; and the 
Minnesota Iron Company, which not only owned large iron ore 
deposits, but also an iron ore railroad from the mines to the Lakes 
(the Duluth and Iron Range Railroad), and a fleet of lake 
vessels by which the ore was carried from the railroad terminus to 
the lower lake ports. The Illinois Steel Company controlled the 
Chicago, Lake Shore and Eastern Railway, connecting its vari- 
ous plants in the vicinity of Chicago; and the Federal Steel 
Company itself acquired the stock of the Elgin, Joliet and 
Eastern Railway, a line connecting with nearly every railroad 
entering Chicago. The Federal Steel Company was thus well 
integrated; in fact, the chief purpose in its formation seems to 
have been not so much the suppression of competition as the 
creation of an organization that would be independently 
situated, not only with respect to its manufacturing plants, but 
also with respect to its ore, fuel, and means of transportation. 

The Federal Steel Company, like the Carnegie Company, 
produced chiefly billets, steel rails, plates, structural shapes, 
wire rods, and semi-finished steel for the trade, many of its 
largest customers being themselves steel manufacturers. At 
the time of its organization in 1898 it produced about 15 per cent 
of the country*s output of ingots, somewhat less therefore than 
the output of the Carnegie Company.* The Federal Steel Com- 
pany was generally rated as a Morgan property. 

The Na,tional Steel Company. Next in importance after the 
Carnegie Company and the Federal Steel Company was the 
National Steel Company, organized in February, 1899. The 
National Steel Company was a consolidation of a nimiber of 
steel concerns, located mainly in Ohio, and producing in 1899 
about 12 per cent of the total output of steel ingots.* It pro- 

* Report of the Commissioner of Corporations, part I, p. 88. 

* Ibid., p. 89. 


duced chiefly semi-finished steel, i. e., billets, sheet bars, and 
tin plate bars, rather than the finished products. It had an 
excellent market for its crude steel through its close affiliation 
with the American Tin Plate Company, the American Steel 
Hoop Company, and the American Sheet Steel Company, all 
promoted by Judge W. H. Moore (the organizer of the National 
Steel Company), and all obtaining their raw material largely 
from it. The National Steel Company carried i ntegr ation almost 
as far as the Carnegie Company and the Federal Steel Company, 
but differed from them in being also a combination of formerly 
competitive concerns. ^ 

The Aniedcan_-IiiL-Plate^ Company — the tin plate trust. 
This company, organized in December, 1898, illustrates a group 
of combinations formed, not to integrate more fully the business 
of production (and thus to achieve a more strategic position), 

but to rpf^traiii ftf pyHuHp mmpptitinp It brought together 

39 plants, controlling 279 mills, which represented nearly every 
concern in the country making tin plate.^ It effected, therefore, 
a tin plate trust. Having done so, it attempted to strengthen its 
position by entering into exclusive contracts with the principal 
manufacturers of rolls and machinery used in the manufacture 
of tin plate, and thus to oppose an effective obstacle to the 
construction of competing mills.^ While this scheme was not 
altogether successful (the contracts were cancelled in 1902 at the 
insistence of the Steel Corporation), the company did succeed in 
maintaining for several years a monopolistic position in its 
branch of the steel industry. 

The Ameri can Steel and^ ireXyjlPp^Tiy pf N^iy Jf>rRpy — the 
wire trust. This company represented another attempt to 
restr ain comp etition and to make large promoters' profits. The 
dissolution of the wire nail pool toward the close of 1896 had 
been followed by marked reductions in prices, and this led to the 

» Brief for the United States (no. 481), vol. II, p. 170. The United States 
Steel Corporation admitted that the American Tin Plate Company acquired 
control of concerns producing 90 per cent of the country's output of tin plate. 
Brief for the Steel Corporation (no. 481), p. 77. 

' Brief for the United States (no. 481), vol. II, p. 192. 


organization in March, 1898, of a combination, — ^the American 
Steel and Wire Company of Illinois. The next year (January) 
the combination united with most of the remaining wire con- 
cerns to form the American Steel and Wire Company of New 
Jersey.* This company produced mainly wire nails, plain wire, 
barbed wire, and wire fencing; and according to the brief for 
the government in its suit against the United States Steel Cor- 
poration it secured an almost complete monopoly of barbed wire 
and woven wire, and controlled about four-fifths of the nails and 
the wire fencing produced m the United States.^ The American 
Steel and Wire Company was well integrated, possessing, either 
at its organization or shortly thereafter, large ore deposits, a 
big reserve of coking coal, a large fleet of Lake vessels, and 
facilities for producing a limited amount of pig iron and crude 

The National Tube Company — the tube trust. The National 
Tube Company was incorporated in June, 1899, to monopolize 
the tubing industry, and incidentally to enable its promoters to 
make a profit through its organization (one-quarter of its $80,- 
000,000 stock issue was given to the promoters). Its principal 
product was iron and steel wrought tubing, and the company 
stated in 1900 that its yearly capacity was 1,000,000 tons, or 
90 per cent of the total capacity of the coimtry.^ While this may 
have been an exaggeration of the extent of its control, neverthe- 
less the company did produce nearly three-fourths of the co\m- 
try^s output of wrought tubing.^ The National Tube Company, 
though rated as a Morgan concern, was largely dependent, be- 
cause of the location of its plants, on the Carnegie Company for 
the semi-finished steel that constituted its raw material. Subse- 
quently it proposed to produce itself most of its raw material, 
with consequences soon to be described. 

The American Steel Hoop Company. This company was 

* Report of the Commissioner of Corporations, part I, p. q2. 

* Brief for the United States (no. 6214), part I, p. 50. 

* Ibid., (no. 481), vol. II, p. 222. 

* See Report of the Commissioner of Corporations, part I, p. 92; Brief 
for the United States (no. 6214), part I, p. 53; and 223 Fed. Rep. 167. 



formed in April, 1899. It united nine concerns producing 
mainly iron and steel bars, hoops and bands, cotton ties, and 
iron skelp. It was primarily a combination of erstwhile competi- 
tive concerns, and, according to the Commissioner of Corpora- 
tions, a desire to limit competition and afford a large profit to the 
promoters was imdoubtedly the ruling motive in its organization.^ 
The promoters received for their services $5,000,000 of the 
$33,000,000 stock issued by the company, or over 15 per cent of 
its total capitalization.^ 

The American Shee t St ft^l Cfrmpnny — the sheet steel trust. 
This company was organized in March, 1900, to consolidate the 
properties of the principal manufacturers of sheet steel. Like 
the American Tin Plate Company it was formed to unite com- 
peting concerns; and it secured control upon its organization of 
about 70 per cent of the coimtry's capacity of sheet steel, the 
only important product made by it.* 

TheJ^meriran Bridge Qmipany. This company, like most of 
those already described, was organized (April, 1900), not to 
secure the advantages of integration, but the profits arising from 
a curbing of competition.* Its main business was the erection of 
bridges and of steel construction for buildings, and it was entirely 
dependent on the large steel manufacturers for its raw material. 
The American Bridge Company, like the Federal Steel Company 
and the National Tube Company, had close aflUiations with the 
firm of J. P. Morgan and Company. 

The Shelby Steel Tube Company — the seamless tube trust. 
This company, incorporated in February, 1900, combined practi- 
cally all the concerns in the coimtry manufacturing seamless 
tubing.* It claimed 90 per cent of the country's output, and 
there is no doubt that it did have a substantial monopoly of its 
special product until its field was invaded by the National Tube 
Company. The motive in its organization was the establish- 

* Report of the Commissioner of Corporations, part I, p. 91. 
« CL p. 287. 

* Report of the Commissioner of Corporations, part I, p. 91. 

* Ibid., p. 93. 


ment of a trust; the element of int^ration was distinctly 

The Lake Superior Consolidated Iro n Min es. The combina- 
tions and trusts just described were all organized between 1898 
and 1900, and each of them became a part of the United States 
Steel Corporation. One other concern, organized somewhat 
earlier, deserves mention. The Lake Superior Consolidated 
Iron Mines, largely owned by Standard Oil interests, was or- 
ganized in 1893. It manufactured no iron or steel; it was simply 
an ore producer and a transportation company. It had vast 
reserves of iron ore, and it owned an important iron ore rail- 
road, — the Duluth, Missabe and Northern. Affiliated with it 
was the Bessemer Steamship Company, the largest owner of ore 
vessels on the Great Lakes. The Lake Superior Consolidated 
Iron Mines, both because of its property and its financial back- 
ers, was a very important concern,, and its acquisition by the 
United States Steel Corporation in 1901 greatly strengthened 
the latter's position. • 

What is the explanation of this remarkable movement to- 
ward combination in the iron and steel industry? The advan- 
tages which these combinations might have expected to gain 
were three-fold: (i) the restdctioa. ii£_ compititinn; (2) a 
greater degree of integration; (3) stodcjnarket p rofits fo r the 

The large profits that the manufacturers hoped to gain were 
realized. Aided by the favorable industrial situation, these 
combinations and trusts were able to put prices up to very hi^ 
figures. The price of Bessemer pig iron, which had averaged 
$10.32 per gross ton in 1898, went up to $18.88 per ton in 1899, 
and to $24.72 in March, 1900. The price of steel billets had been 
$15.18 per gross ton in 1898; it rose to $29.81 per ton in 1899, and 
to $33.00 in March, 1900. The price of steel rails averaged 
$17.63 per gross ton in 1898, $28.13 i^ 1S99, and $35.00 in March, 
1900. The price of tin plate averaged $64.08 per gross ton in 
1898; the next year it went to $95.48. Prior to the formation 
of the tube trust the price of tubes had been $30.00 per ton. 
During 1899 (the year of its formation) the price rose to $67 per 



gross ton, and early in igcx) reached its maximum at $89.^ 
Further details may be had by consulting the table.^ It is not 
meant to imply, of course, that all of these price advances 
were the result of the formation of combinations and trusts; 
but it is safe to say that they took full advantage of the favor- 
able industrial situation.^ 

The desire to ^-^^^nct ftr ^^^'^inatff rO"^p etition was , according 
to the Commissioner of Corporations, undoubtedly the main 
reason for the formation of these combinations. Taken as a 
whole, the iron and steel manufacturers had been very prosper- 
ous, but the severe industrial depression which began in 1893 
and lasted imtil 1897 had cut into their profits heavily.* The 
manufacturers were anxious to restore the palmy days, and 
therefore turned to combination and monopoly as likely to prove 

• 223 Fed. Rep. 168. 

"Average Prices of Certain Iron and Steel Products in i8q8, 
1899, and March and October, 1900 * 


Pig iron t 


Rails t 

Plates t 

Structural shapes (beams) t 

Tin plates § 



Sheets (black) t 

Per gross ton 







15 18 
17 63 


33 00 
35 00 


49 36 













24 19 
33 60 


* Brief for the United States (no. 481), vol. I, pp. 39, 48. 

t F. o. b. Pittsburg. 

} F. o. b. Pennsylvania manufacturing plants. 

f F. o. b. New York. 

' For a further discussion^ see p. 263. 

*The competition between the steel manufacturers was not "ruinous." 
Sec Jones, Quarterly Journal of Economics, 34, pp. 497-502. 


more eflFective than pools, which were not only industrially 
unstable, but illegal as well. 

A second advantage in conibinati gn lay in_t hej»ossibilities 
of integration. A company which combined under one manage- 
ment the successive stages in the productive process was able to 
eflFect certain economies that were not open to a nonint^rated 
concern. These economies included a saving in fuel costs (those 
connected with the reheating of the metal), a saving in the labor 
and time involved in moving the materials, and the utilization 
of by-products, especially blast furnace gas. These particular 
economies, of course, could be availed of only by a vertical com- 
bination (an integrated concern); a horizcMrtal combination (a 
combination of plants making substantially the same product) 
must justify itself, if at all, on other grounds; must point to other 
economies than those mentioned. On this phase of the matter 
more will be said later,^ but we may note at this point the neces- 
sity of keeping clearly in mind the distinction between the 
economies in producing and selling that were attainable by 
such of these combinations as did not possess monopolistic 
power (the Carnegie Company, the Federal Steel Company, and 
the National Steel Company, for example), and the additional 
economies that might be secured through the organization of 
a trust (with monopolistic power), as, for example, the American 
Tin Plate Company, the American Steel and Wire Company, and 
the National Tube Company. The economies permitted by 
integration were notable, and no doubt combinations formed to 
realize them were in the public interest. Yet, as we have seen, a 
number of these early steel combinations were not vertical 
combinations, but horizontal combinations. They were not 
organized for the purpose of securing the advantages of integra- 
tion, but the profits of monopoly. As the Circuit Court said: 
"Properties were assembled and combined with less regard to 
their importance as integral parts of an integral whole than to 
the advantages expected from the elimination of the competition 
which theretofore existed between them.'' ^ 

* See ch. 19. 

• 223 Fed. Rep. 167. 


Another g ain from ^integration was the possibility it offered of 
securing the profite^which would otherwise go to the manufac- 
turers or producers^ of the products at the ea rhVr stagftR Here 
was an opportunity to apply Mr. Rockefeller's maxim, "pay a 
profit to nobody." The gain was especially worth while because 
of the possibility that a pool or combination controlling the 
necessary raw material or semi-finished products might charge 
unreasonable prices. The company producing its own raw 
materials was assured an ample supply of them at cost to itself. 
With it companies not so well fortified could not compete 

The third advantage offered by Ihe-combination 4vas the 
opportunity^of mnkincju-nfitiT. from thr lah of thr securities 
of the consolidated companies. The profits which were made in 
this way were of two kinds: first, those made by the manufac- 
turers themselves; and, second, those made by the promoters. 
That the promoters had a direct financial inducement to form 
combinations and trusts is shown by the fact that the promoters 
of seven of these organizations (Federal Steel Company, Na- 
tional Steel Company, American Tin Plate Company, American 
Steel and Wire Company of New Jersey, National Tube Com- 
pany, American Steel Hoop Company, American Bridge Com- 
I>any) received in the aggregate over $63,000,000 in stock as their 
pay.* This was not all profit, to be sure, but to say that the 
compensation was very liberal is expressing it mildly. The 
profits were likely to be greater, of course, when the promoters 
were successful in establishing a trust than when they simply 
eflfected a combination possessing no monopolistic power. Some 
of these iron and steel combinations, as has been shown, be- 
longed to one class; some, to another. 

The underlying motive in the formation of the steel combina- 
tions and trusts of 1898-1900 was, as we have seen, th ^ restric - 
tion or smothering of competit ion. Yet competition, though 
greatly restrained in several branches of the steel industry, was 
not destroyed. Indeed it soon appeared that the formation of 
these combinations was likely to lead to even more vigorous 

^ See p. 287. 


competition than ever. This unexpected outcome was the 
result of an attempt on the part of some of these combinations 
to integrate themselves so fully that they would be entirely 
independent of any other steel concern. To ward oflF the threat- 
ened competitive struggle, the United States Steel Corporation 
was formed. The circumstances leading up to its formation 
may be considered in some detail. 

The combinations already described may be roughly divided 
into two groups: (i) {JTejrimary grniip^ including the Carnegie 
Company, the Federal Steel Company, and the National Steel 
Company, concerns manufacturing chiefly semi-fini^ed steel 
and the heavy steel products; (2) the sec ondary gr oup, including 
the American Tin Plate Company, the American Steel and Wire 
Company, the National Tube Company, the American Steel 
Hoop Company, the American Sheet Steel Company, the 
American Bridge Company, and the Shelby Steel Tube Com- 
pany, concerns manufacturing chiefly the lighter and more highly 
elaborat ed steel products. The companies in the secondary 
group were~la7geTy7~some almost entirely, dependent on the 
primary group for the semi-finished steel which constituted 
their raw material; while the primary group, in turn, disposed of 
a large part of its output to the secondary group. There was 
thus a marked interdependence among the two groups, and for 
a while all went well. 

This state of harmony, however, was not to endure. During 
1900 the steel trade suffered a reaction, which made necessary 
the reduction of expenses, if returns large enough to pay divi- 
dends on watered stock, were to be realized. Some of the 
concerns in the secondary group soon proposed therefore to 
integrate themselves still further, and thus to obtain their raw 
material at cost. The American Steel and Wire Company of 
New Jersey, for example, made plans to build additional blast 
furnaces and a large steel plant. The Carnegie Company and 
the Federal Steel Company, both of which had just enlarged 
their works, therefore faced the loss of a market for a consider- 
able part of their output. To protect themselves, they decided 
to produce the more highly elaborated products, thus making use 


of nearly their entire semi-finished steel output and freeing 
themselves from their dependence on other steel manufacturers. 
In 1900 the Federal Steel Company proposed to undertake the 
manufacture of tubes and structural material. In the summer of 
1900 it was reported that the Carnegie Company would engage 
on a large scale in the manufacture of wire rods. In January, 
1901, the Carnegie Company announced that it proposed to 
build at Conneaut Harbor, Ohio, the largest pipe and tube plant 
in the world.^ The impression was current that the Carnegie 
Company would eventually make tin plate, sheet steel, and other 
finished products. The outcome of this policy of retaliation 
would clearly be two-fold : first, an increase in the country's pro- 
ductive capacity far beyond its normal consuming power; and, 
second, an abrupt termination of the monopolistic or semi- 
monopolistic position attained by the concerns in the secondary 

A severe competitive struggle thus seemed imminent. And in 
such a struggle it was generally believed that the Carnegie Com- 
pany would emerge the victor. This concern was credited with 
owning the best equipped and best managed steel plant in the 
country, if not in the world. In self-sufl5ciency of product it was 
well ahead of its rivals. In fact, there seems to have been little 
doubt that from the manufacturing standpoint the Carnegie 
Company would have proved more than a match for its com- 
petitors, many of whom, in their endeavor to monopolize the 
business, had been obliged to acquire at high prices numerous 
inferior plants. From the banking and financial standpoint the 
Carnegie Company was equally well fortified. It had ample 
capital and credit; and its securities were closely held, hence its 
owners were uninfluenced by stock market considerations. As 
Mr. Carnegie had remarked, the partners knew nothing about 
the manufacture of bonds and stocks; they knew only about the 
manufacture of steel. The Morgan companies — the Federal 
Steel Company, the National Tube Company, and the American 
Bridge Company — naturally had excellent financial backing, but* 

1 Brief for the United States (no. 481), vol II, pp. 479-481. 


the Morgan financiers were lied up in other lines, particulariy 
railroad enterprises, and they did not welcome a steel war. The 
Lake Superior Consolidated Iron Mines with Rockefeller support 
' could, of course, have weathered any struggle, but this company 
was not engaged in steel manufacturing, and therefore was not 
directly concerned. The remaining comjjanies, however, mostly 
Moore concerns, were very heavily overcapitalized, and had a 
highly speculative backing. The promoters of these companies 
had not yet had sufficient time to unload on the public, and so 
far as they were concerned a trade war had to be prevented at all 
hazards. Could the conflict be averted, the promoters could 
await a favorable opportunity for the disposal of the stocks held 
by them, and they might even realize some additional profits 
through the sale of the securities of the consolidated company 
on the rising market that would follow the restoration of har- 
monious relations. 

The resiJt of this situation was the formation of the present 
steel trust. On February 25, 1901, the United States Steel 
Corporation was incorporated under the laws of New Jersey 
(with an authorized capital stock of $3,000), in accordance with a 
plan to acquire the seciuities of the Carnegie Company, the 
Federal Steel Company, the National Steel Company, the 
American Tin Plate Company, the American Steel and Wire 
Company, the National Tube Company, the American Steel 
Hoop Company, and the American Sheet Steel Company.* The 
offer of the Steel Corporation to exchange its seciuities for those 
of the companies named was promptly accepted by a great 
majority of the stockholders (over 98 per cent in each case) ; and 
therefore on April i the Corporation filed amended articles of 
incorporation whereunder its authorized capital stock was 
increased to $1,100,000,000.^ By this process of exchange 
(when completed) the Steel Corporation became strictly a hold- 
ing company trust. Shortly thereafter it acquired the American 
Bridge Company, the Lake Superior Consolidated Iron Mines, 

* Chron., 72, p. 441 (March 2, 1901). 

* Chron., 72, p. 679 (April 6, 1901). For the terms of the exchange see 
Brief for the United States (no. 481), vol. I, pp. 54-56. 



the Bessemer Steamship Company, and the Shelby Steel Tube 

The restriction of competition w as plaiiil^^^fijiiaia-HlQtive 
for the formation of the Steel Corporation JWe should not be^. 
surprised, therefore, to learn that not only was the decline in 
pnces then taking place arrested, but_^at_prices were actually 
advanced. This is shown by the table below, giving the average 
monthly price of certain iron and steel products in October, 1900 
Oust prior to the negotiations leading to the organization of the 
Steel Corporation), and their price in May, 1901, the first month 
after the organization of the Corporation. 

Average Price of Cbstain Iron and Steel Products in October, 

1900, AND May, 1901 • 

(Per gross ton) 


October, igoo 

May, igoi 

Piir iron * 









Plates « 



Structural shapes (beams) * 
Tin plates* 

Wire iwils * 


Sheets (black) * 

Tlioiigh the restriction of competition was the controlling 
motive in the organization of the Steel Corporation, at least two 
other influences were present. One was the desire to seaire large 

^For a list of the subsidiaiy concerns controlled by the constituent 
companies of the United States Steel Coiporation, see Brief for the United 
States (no. 481), vol. n, pp. 753-762. 

' Judge Woolley in a separate opinion in the steel trust case said that his 
conclusions of fact and of law were that the organizers of the Corporation 
intended to create a monopoly and to restrain trade. 223 Fed. Rep. 178. 

' Brief for the United States (no. 481), vol. I, pp. 48, 62. 

* F. o. b. Pittsburg. 

* F. o. b. Pennsylvania manufacturing plants. 

* F. o. b. New YoA. 


profits through the sale of the seniritiea o f ^^ new roTp pfliiy. 
This matter is discussed iii chapter XII; it will suffice here to 
point out that the underwriting S3mdicate realized a profit of 
$62,500,000 through the promotion of the Steel Corporation. 

Another reason for the organization of the Steel Corporation 
wjtsthe desirability of integrating the bu siness more fidly , and o f 
securing the economies of the tnist Jorni of organization. TTiese 
two considerati<Mis, ta repeat, must Be sharply distinguished. 
Complete integration can be secured without resort tojato^ist, 
i. e., without attaining a monopolistic position at any stage in the 
process of production, whereas the economies of the trust form of 
organization can be secured, of course, only by a trust. The 
significant inquiry always is: can a trust produce more cheaply 
than a combination, more cheaply even than a highly int^;rated 
combination? If it can, anti-trust l^islation is likely to prove 
futile. Now the organization of the Steel Corporation did lead 
to a somewhat greater degree of integration. The bringing to- 
gether xmder one control of the iron ore mines, the iron ore rail- 
roads, the Lake vessels, the coking coal properties, and the plants 
making all kinds of iron and steel products meant that the Coi;- 
poration was quite independent of others, and that no profits at 
any stage in the productive process need to be paid to anyone 
else. So far as the manufactiuing processes were concerned, it is 
doubtful whether anything particular was gained; the advan- 
tages of integration were already about as fully realized by the 
larger and stronger of the constitutent companies,^ such as the 
Carnegie Company, or if not already realized, would have been 
upon the completion of the extensions proposed in 1900 to 1901. 

As to the economies of the trust form of organization detailed 
information, as usual, is difficult, if not impossible, to secure.^ 

' Rqx>rt of the Commissioner of Coiporadons, part I, p. 108. 

' The Bureau of Coiporations in part III of its Rqwrt on the Steel Indus- 
try made a study of the cost of producing various steel products, but its 
investigation threw no light on the costs of the Steel Coiporation as com- 
pared with the costs of other laige and well integrated concerns. In fact, 
the Bureau, in order to protect the privacy of business, particularly refrained 
from giving any figures which would reveal the costs at the several inde- 
pendent plants. 


It is probable that the steel trust, simply because it was a trust, 
did effect certain savings. The combining of so many manu- 
facturing properties imder one management probably made 
possible a more economical subdivision of the business whereby 
particular plants could specialize on certain products, with 
a consequent reductioaJn cost. The distribution of the Steel 
Corporation's plants also gave it an important advantage 
with respect to transportation costs; it could ship from the 
nearest mill, and thus save cross freights.^ Savings were \m- 
doubtedly effected through co mpetition bet ween the managers, 
of the different plants; and a more complete utilization was made 
of cjPTfsi\n hy-proHiirtj;^ such as blast fumace slag (used in the 
manufacture of cement), which was formerly a waste product.* 
No doubt, also,* the large capital possessed by the Steel Corpora- 
tion assisted it in deve loping tb< ^ ^yp^^^ tradp — claimed by the 
promoters to be one of the principal reasons for forming the 
Corporation — ^but it does not follow that the amoxmt of capital 
required could have been supplied only by a trust. How im- 
portant the above enumerated economies were it is not possible 
to say, but in view of the rapid growth of the independent con- 
cerns, as described later, it is not likely that they were control- 
ling. Certainly few, if any, economies were achieved by the 
trust in the selling end; selling expenses in the iron and steel trade 
are a COThparatively minor factor.' In fact, the Commissioner of 
Corporations believes, the argument of economy in production 
was probably brought forward to justify the establishment of the 

trust, and to promote the sale of the company's securities; the 


1 Mr. Schwab at a dinner held on December 12, 1900, discussed the ad- 
vantages that might be derived from a combination, and referred specifically 
to specialization, locatbn of plants near the centers of con^unption, com- 
petition of the several managements, reduction in overheaa expense, and 
the development of the export trade. He expressed the opinion that from a 
metalhugical or mechanical standpoint the limit of economies had been 
reached, or nearly so, so highly perfected had the processes of manufacture 
become. Brief for the United States (no. 481), vol. II, pp. 508-510. 

"Brief for the United States Steel Coiporation (no. 481), pp. 106- 

' Report of the Commissioner of Corporations, part HI, pp. 20-21. 


main reason for the organization of the Steel Corporation was 
certainly the hope of averting tlie thrfiatening. competitive 

The capitalization of the Steel Corporation was enormous. 
Under its amended certificate of incorporation it issued $304,- 
000,000 of bonds, exclusive of $81,000,000 underlying indebted- 
ness, and was authorized to issue $1,100,000,000 of stock, half 
preferred and half common. All of the bonds and $425,000,000 
of each class of the stock were issued, mainly in exchange for the 
seciudties of the companies first acquired.^ Shortiy after its 
organization the Corporation acquired the Lake Superior Con- 
solidated Iron Mines and other concerns, and as a result its issue 
of each class of stock increased to over $500,000,000, making a 
total stock issue of over $i,opo,ooo,ooo. The Steel Cor- 
poration, measured by capitalization, and perhaps by any 
test, was the largest industrial corporation the country had 
yet produced. 

The company upon its organization controlled three-fifths of 
the steel business of the country.' It produced almost 60 per 
cent of the pig iron used for steel making purposes, about 66 per 
cent of the crude steel output, and about 50 per cent of the 
finished steel products in the manufacture of which it was 
engaged. It had hundreds of millions of tons of iron ore; over 
50,000 acres of the best coking coal lands; over 1,000 miles of 
railroad, including the iron ore railroads; more than one hundred 
Lake vessels; and large miscellaneous holdings, such as docks, 
natural gas and limestone properties. Yet despite its enormous 
size the Steel Corporation did not secure a monopoly of the iron 
and steel industry, though in certain lines its position was dis- 
tincUy monopolistic.^ This is indicated by the following table, 

^ Report of the Commissioner of Corporations, part I, pp. 108-109. 

* Ibid., p. 106. 

* Ibid., p. 109. 

* That its position was not even more monopolistic in certain lines resulted 
from the fact that some of the constituent trusts had lost heavily in their 
percentage of the country's trade since their oiganization some two or three 
years previous. See on this point Brief for the Steel Corporation (no. 481), 
p. 77, and 223 Fed. Rep. 134, 


showing the Steel Corporation's computation of its proportion of 
the country's output of the leading products in 1901.^ 

Per cent 

Pig iron, spiegel and ferromanganese 43 . 2 

Steel ingots and castings 65 . 7 

Rails 59.8 

Structural shapes 62 . 2 

Plates and sheets 64.6 

Black plate produced in tin mills 79.8 

Coated tin-miU products 73 . i 

Black and coated sheets produced in tin mills 67 . 3 

Wire rods 77.7 

Wire nails 68 . i 

Wrought pipe and tubes 57.2 

Seamless tubes 82.8 

Among the more important rivals of the Steel Corporation 
in 1901 were Jones and Laughlin, the Lackawanna Iron and 
Steel Company, the Republic Iron and Steel Company, the 
Pennsylvania Steel Company, the Cambria Steel Company, and 
the Bethlehem Steel Company. The Colorado Fuel and Iron 
Company because of its location was not an effective rival, 
though the Steel Corporation conducted negotiations looking 
toward its acquisition; and the Tennessee Coal, Iron and Rail- 
road Company was at this time chiefly engaged in the produc- 
tion of foimdry pig iron. 

The capitalization of the Steel Corporation as noted above 
was enormous. But so was the amoimt of property acquired. 
Was the Corporation overcapitalized? 

The capitalization of the company in 1901 after the acquisi- 
tion of the Shelby Tube Company (in August) was as follows: ^ 

Steel Corporation bonds $303^50,000 

Underlying bonds 59,091,657 

Purchase money obligations, etc 21,872,023 

Preferred stock 510,205,743 

Common stock 508,227,394 

Total $1,402,846,817 

^ Report of the Commissioner of Corporations, part I, p. 365. See also 
p. 214. * Ibid., p. 14. 


The Bureau of Corporations made a detaUed study of the value 
of the properties of the Steel Corporation in 1901 in order to 
determine whether the company was overcapitalized, and if so, 
to what extent. Three different methods were employed. The 
first method was an historical study, an analysis of the invest- 
ment of the constituent companies at the time of their organiza- 
tion. The s econd method was a mathematical computation, a 
summation of the market value of the securities of the constitu- 
ent companies, using the average weekly prices from the date of 
the organization of these combinations up to December 31, 1900. 
The market prices during the early months of 1901 were not 
included, since these were naturally influenced by the prog)ec- 
tive organization of the Steel Corporation. This second method 
represented the estimate put by the public on the securities of 
the constituent companies, and it therefore reflected the prob- 
able earning power of these combinations. The ^hird method 
was a physical valuation, a detailed estimate of the physical 
properties of the Steel Corporation by departments of its busi- 
ness, the valuation of the ore properties being made in particular 
detail. The valuation arrived at by the Bureau by the first 
method was $676,000,000; by the second method, which included 
intangible items, $793,000,000; and by the third and more 
accurate method, $682,000,000.^ 

The c ondusioiL of the Bureau, therefore, was that the entire 
issue of conmion stock was water, i. e., had no property back of 
it; and that a large amount, one-fifth to two-fifths, of the pre- 
ferred stock was water. Even including the intangible assets, the 
conmion stock represented nothing but the hope of monopoly 
gains. By any reasonable standard, therefore, the Steel Corpora- 
tion was very heavily overcapitalized. 

After 1901, however, the Steel Corporation added greatly to 
its investment. This it did, first, by thfi construction of addi- 
tional plants out of surplus earnings or out of the proceeds of 
issues of seciurities; and, second, by the acquisition of competing 
concerns through the sale of its own securities. The most 
important piece of new construction was the plant at Gary, 
* Report of the Commissioner of Corporations, part I, p. 15. 


Indiana, the largest steel plant in the world. This plant up to 
December, 191 1, by which date practically all the construction 
then authorized had been completed, had cost over $62,000,000.^ 
Another new steel plant was built in Duluth, Minnesota, and a 
very large cement works was constructed in Bufl^gton (near 
Chicago) by the Universal Portland Cement Company, a sub- 
sidiary of the Steel Corporation. Other important additions also 
were made by the Steel Corporation (through its subsidiaries). 

The investment of the Steel Corporation has likewise been 
increased through the acquisition of competing companies. 
In 1902 the Steel Corporation purchased the Union Steel Com- 
pany, which held large deposits of iron ore and coking coal; and 
in 1904 it acquired all the stock of the Clairton Steel Company, 
then in receiver's hands, but in the possession of important ore 
and coking coal lands. 

Rut far more important was the piir^hafir in Nftv^mbpr, 1907, 
of the Tennessee Coal^ Iron and Railroad Company. This 
company, with its main plant located at Ensley, Alabama, was 
the most important iron and steel concern in the south. It pro- 
duced 3 per cent of the country's output of iron ore, 2.9 per cent 
of the output of coke, 2.4 per cent of the pig iron, i.i per cent of 
the ingots and castings, and 4.3 per cent of the rails.^ Partly 
because of the fact that all the essential materials were assembled 
by nature within a radius of a few miles, the Tennessee Company 
was able to manufacture pig iron cheaper than it could be made 
in any other section of the United States.' The company was 
controlled by powerful financial interests; and improvements 
were then under way to double its steel output and rail capacity. 
TTie Tennessee Company made open-hearth steel rails — in 
1907 it produced 59.1 per cent of the total output of open- 
hearth rails — and was thus in a position to profit by the in- 
creasing demand for that type of rail.^ But the most impor- 
tant assets of the Tennessee Company were its enormous hold- 

^ Tenth Annual Report of the Steel Corporation, p. 28. 

* Report of the Commissioner of Coiporations, part I, p. 258. 
' Brief for the United States (no. 6214), part I, p. 11. 

* Ibid., (no. 481), voL II, p. 731. 


ings of ore and coal; it owned more iron ore and coal adapted for 
making steel than any company in the United States except the 
Steel Corporation.^ There can be no doubt that the desire to 
secure these deposits had much to do with the purchase of the 
company. Moreover, the acquisition of the Tennessee Company 
made it impossible for it to effect a combination with the 
Republic Iron and Steel Company and the Sloss-Sheffield 
Steel and Iron Company, as had been planned, and thus to 
become an even more formidable competitor of the United 
States Steel Corporation. 

The construction of new plants and the acquisition of compet- 
ing plants greatly increased the investment of the Steel Corpo- 
ration. This investment in 1901, as shown above, was $676,000,- 
000. Between 1901 and the close of 1910 the investment in- 
creased by $504,928,653, of which amount about $435,000,000 
was provided for out of surplus earnings.^ By December 31, 
1910, therefore, the total investment of the Steel Corporation 
amoimted to $1,181,000,000. The capitalization of the company 
on the same date was $1,468,033,260, or about $287,000,000 in 
excess of the investment. In other words, about $287,000,000 
of the Steel Corporation's stock was still "water." It is apparent 
that after 1901 the Corporation squeezed out a lai^e part of the 
water in its stock. In 1901 the amount of water had been $726,- 
000,000, using the actual investment as the basis of calculation, 
and $720,000,000, using the physical valuation as the basis. By 
1910 the amount of water had been reduced to $287,000,000 by 
the first method of calculation, and to $281,000,000 by the second. 
All of the water had been extracted from the preferred stock, and 
about half of the water from the conmion stock. 

To have added so greatly to the value of its pn^)erty, the 
earnings of the Steel Corporation must have been enormous. 
That they were so in fact is indicated by the table below, show- 
ing for the years 1901 to 1910 — the government dissolution suit 

* Brief for the United States (no. 6214), part I, pp. lo-ii. 

* Report of the Commissioner of Corporations, part I, p. 49. This increase 
in the investment was over and above a proper allowance for maintenance, 
repairs, and depreciation. 



was brought in 191 1 — the total mvestment of the Steel Corpora- 
tion in tangible property, the net earnings, and the ratio of the 
net earnings to the investment* 

Year ending 
December ji 

Total investment 

in tangible property. 

000 omitted 

Net earnings * 

000 omitted 

Per cent 


$ 698,869 







S 77,741 ' 







14.8 * 



15 9 

II. 7 



15. 1 
14.. 4. 








y f •-'•-••••■•• 



m.\fKmj J. 


y^y •• 






The table shows that the net earnings of the Steel Corporation 
ranged from $62,000,000 in 1904 (its worst year) to $155,000,000 
in 1907 (its best year); and averaged $112,000,000 for the ten 
year period. By the side of such earnings, the profits of the 
Standard Oil Company, large as they were, seem small indeed.^ 
The table shows further that the profits of the Steel Corporation 
from 1901 to 1910 averaged 12 per cent on its investment. The 
average rate of profit, however, underestimates the prosperity of 

^ Report of the Commtssioner of Corporations, part I, p. 54. 

' The net earnings are not those given in the annual reports of the Steel 
Corporation; the Bureau has revised the Corporation's figures somewhat. 
Thus, the Corporation deducted interest on its bonds in determining its net 
earnings; the Bureau restored these interest payments to the net earnings, 
as it was desirous of finding out what the property actually earned rather 
than the distribution of earnings among the different classes of security 
holders. Other changes were made by the Bureau in arriving at its figures 
of net earnings. 

' Nine months, April to December. 

* Indicated rate per annum, based on actual earnings for nine months. 

» Cf . p. 88. 


the Steel Corporation. In the first place, the investment in- 
cluded a large amount of idle property, particularly undeveloped 
iron ore lands; and this naturally tended to reduce the rate of 
profit on the investment. But more important, the profit of 12 
per cent covered the entire investment, whether that investment 
was represented by 5 per cent bonds, 7 per cent preferred stock, 
or common stock. The rate of profit on the investment r^re- 
sented by common stock was of course much higher than 12 i>er 
cent. But just how much higher, it is not possible to say; the 
Bureau found it impossible to make a satisfactory computation. 
The net earnings of the Corporation, the sum available for 
dividends on its common stock, and the percentage earned and 
paid on its common stock during the years 1901 to 191 1 (the 
year in which the government suit was brought) are shown in 
the table below. 

Earnings and Dividends of the Steel Corporation, 1901 to 19 11 

Earned on 


Paid on 

Net earnings} 

common stock. 

common stock 

common stock 

000^000 omiUed 

000 yooo omitted 

Per cent 

Per cent 














4 92 






• • • • 





• • • • 





I 50 









4 05 











5. 50 






In view of the fact that all of the common stock was "water," 
this record must have been quite gratifying to the stockholders 
of the Corporation. How much more so must this have been 

^ After deduction of expenses for ordinary repairs and maintenance, 
interest on bonds, fixed charges of subsidiary companies, and employees' 
bonus funds. Cf. p. 211 (note). 

* Nine months only. 


true in 1916, when because of the unusual demands for steel 
arising out of the war there was earned on the common stock 
$246,000,000, or 48.46 per cent! 

Yet in spite of the large sums expended in the construction of 
new plants, in spite of the acquisition of important competitors, 
and in spite of its enormous earnings, the Steel Corporation was 
not able to maintain the prominent position which it held at its 
organization in 1901. This is indicated by the table on page 214, 
showing the proportion of the country's business done by the 
Steel Corporation in the various lines during the years 1901 to 
1910 ^ (the last year prior to the dissolution suit). 

With respect to iron ore, the Steel Corporation maintained 
fairly weU down to 1910 the position which it attained in 1901. 
Regularly after its formation it produced about 45 per cent of the 
total output of iron ore (1904 was an ofiF year). In 1908 and 
1909, indeed, it produced even more proportionately than in 
1901, yet this was because of the purchase in 1907 of the Tennes- 
see Coal, Iron and Railroad Company, producing about 3 per 
cent of the total output of iron ore. But since 80 to 90 per cent 
of the ore used for steel making purposes comes from the Lake 
Superior region, the Steel Corporation's proportion of the Lake 
shipments gives a better idea of its importance as an ore pro- 
ducer. And these figures tell a somewhat different story. In 
1901 the Steel Corporation controlled over 61 per cent of the ore 
shipped from the Lake Superior region; in 1910 only 51 per cent. 
This points to a relative increase in the business done by the 
independent element. 

In the production of coke likewise the Steel Corporation lost 
ground after its formation. In 1902 — the data are not available 
for 1901 — it produced 37.4 per cent of the country's output of 
coke; in 1910 only 32.7 per cent. These statistics, however, are 
for the total output of coke, and not simply for the coke used in 
the production of iron and steel. The Corporation produced a 
laiger percentage of the coke used in the iron and steel industry 

* Rqx>rt of the Commissioner of Corporations, part I, p. 364. The figures 
for the actual production of the Steel Corporation and of the independents 
from 1901-1910 are shown on pp. 360-363. 


Proportion of Country's Output op Iron Ore, Coke, and Various 
Iron and Steel Products Controlled by the United States Steei. 
Corporation, 1901-1910 

From annual statistical reports of the American Iron and 

Steel Association 

Iron ore: 

Total production . . . 

Shipments from 

Lake region 


Pig iron 

Pig iron, spiegeleisen, 


Ingots and castings: 




Rolled products: 
Bessemer steel raib . . 
Open-hearth steel rails 

Structural shapes 

Plates and sheets. . . . 

Wire rods 

Bars, skelp, etc 

Total finished rolled 

Secondary products ': 

Wire nails 

Tin plates and 
Teme plates .... 




















57. 9 
31 I 







51 o 





73- 1 






























44. 5 


































45 o 


57. 3 





















^ Data not available. 

• None produced by the Steel Coiporation. 

' These are the only secondary products for which data are available. 


than these figures indicate. Controlling, as it did, the choicest 
coking coal lands in the Connellsville region, it was well situated 
with respect to its supplies of coking coal. 

The percentage of the pig iron production of the country 
controlled by the Steel Corporation remained practicaUy un- 
changed between 1901 and 1910. In the former year it produced 
42.4 per cent of the total ; in the latter 43.0 per cent. Here again 
the figures are for the total production, rather than the produc- 
tion for steel making purposes; and therefore they do not show 
the real importance of the Steel Corporation in this field. Yet it 
b evident that the business of the independents increased con- 
siderably, since in 1910 they produced about the same percentage 
as in 1901, despite the acquisition by the Corporation of the 
Union Steel Company and the Tennessee Coal, Iron and Rail- 
road Company. 

Summarizing for the raw materials, it appears that the Steel 
Corporation held its own fairly well, though its favorable show- 
ing resulted in part from the purchase of important competitors. 

The best single index as to the Steel Corporation's position in 
the steel manufacturing industry is the output of ingots and 
castings. In 1901 the Corporation produced 66.3 .per cent of the 
country's output of these products, but in each succeeding year 
it lost ground relatively until by 1910 it produced only 54.7 per 
cent And this decline came in spite of the purchase of impor- 
tant competitors. To be sure, the Corporation's total output 
<rf ingots and castings has increased enormously since 1901. In 
1901 it produced only 8,854,820 tons; in 1910, 14,179,369 tons. 
That the company, despite thb growth, did not hold its own is 
due, of course, to the even more rapid growth of its competitors. 
While the trust did 60 per cent more business in ingots and cast- 
ings in 1910 than in 1901, its competitors did 154 per cent more. 
This, moreover, can not be explained by saying that a large 
omcem finds it more difficult to increase its business at the 
same rate as its smaller comj)etitors, for the competitors of the 
Steel Corporation not only grew at a faster rate, but in the 
aggregate showed an absolute increase in business greater than 
that secured by the Steel Corporation, including, as the latter 


does, the Cam^e Company, easily the most efficient of the steel 
companies prior to its incorporation in the trust.^ Though the 
Steel Corporation was not able to increase its output as rapidly 
as its competitors, nevertheless it produced vastly more than its 
nearest competitor in point of size. In 191 1 the steel ingot 
production of the Corporation was 16,856,914 gross tons (55.6 
per cent of the country's output), while the largest independent 
concern — ^Jones and Laughlin — produced only 1,690,845 tons, or 
5.5 per cent* 

With respect to the rolled products, taking them as a whole, 
the Steel Corporation substantially maintained its position. In 
1901 it produced 50.1 per cent of the total output of rolled 
products; in 1910, 48.1 per cent. In individual lines, however, 
the Steel Corporation lost heavily. In 1901 it produced 62.2 per 
cent of the structural shapes; in 1910, only 51.3 percent (theSteel 
Corporation's output of structural shapes between 1901 and 1910 
increased 85 per cent; that of its competitors 188 per cent). In 
1901 the Steel Corporation made 64.6 per cent of the plates and 
sheets; in 1910, only 48.0 per cent (the Steel Corporation in- 
creased its output 66 per cent between 1901 and 1910; the inde- 
pendents increased their output 223 per cent). In 1901 the 
Steel Corporation turned out 77.6 per cent of the wire rods; in 
1910, only 67.3 per cent (for the Steel Corporation this repre- 
sented an increase of 42 per cent; for its competitors, an increase 
of 139 per cent). In 1901 the Steel Corporation's output of wire 
nails was 65.8 per cent of the total; in 1910, only 55.4 per cent 
(between 1901 and 1910 the Corporation's output increased but 
9 per cent; that of its competitors, 69 per cent). 

The maintenance by the Corporation of its position in rolled 
products as a whole, despite the decrease in these individual 
lines, seems to have resulted from an increase in TKe production 
of bars, skelp, etc., and from the production in 1908 to 1910 of a 
large proportion of the open-he2^rth rails, the Corporation 

1 The Steel Corporation's output of ingots and castings increased between 
1901 and 1910 by 5,300,000 tons; that of its competitors by 7,300,000 tons. 
Report of the Commissioner of Corporations, part I, pp. 360-363. 

* Brief for the United States (no, 481), voL I, p. 152. 


having produced none at all prior to 1908. With respect to 
Bessemer rails, the Corporation produced 59.9 per cent of the 
country's output in 1901, and though there were ups and downs 
in the years that foUowed, it produced in 1910 almost exactly 
the same percentage. In the maintenance of this position the 
Corporation was greatly aided by its raih-oad affiliations. In t 
191 1, for example, one or more directors of the Corporation was 
to be found on the directorate of sixty-two American railroads, 
possessing a mileage equal to almost half that of the whole 
country.^ It would be strange, indeed, if these connections did 
not bring the Steel Corporation some business which otherwise 
would have gone to the independent rail manufacturers. 

It is evident that the high degree of control which the Steel 
Corporation had at the time of its organization was being grad- 
ually lost. Even in the lines in which it had a quasi-monopolis- 
tic position in 1910, it had lost heavDy, almost without excep- 
tion. This decline had taken place, moreover, in spite of the 
diversity of the businesses into which the influence of the Steel 
Corporation ramified. From its organization the officers or di- 
rectors of the company were at various times on the directorate 
of a vast number of industrial companies. The Steel Corpora- 
tion's connections with industrial companies and railroads, all 
large buyers of iron and steel, naturally attracted to it a great 
deal of business. Furthermore, the Corporation had powerful 
moneyed connections. At some time after its organization it 
had directors on as many as eighty-five different banks and 
trust companies, and twenty-five insurance companies.^ In 
addition, according to Mr. Gary, it made a practice of keeping 
about seventy-five million dollars in cash on deposit in banks.* 
The government in its petition went so far as to charge that the 
Corporation had built up '^ a system of interlacing of directorates 

^ Brief for the United States (no. 6214), part U, p. 287. 


■ Senate Rqx>rt no. 1326, 62nd Cong., 3rd Sess., p. 824. On December 
3X1 i9i3f none of the competitors of the Corporation had a capitalization 
equal to the amount of cash held by the Steel Corporation. Brief for the 
United States (no. 481), vol. I, p. 138. 


which embraced abnost the entire commercial and financial 
powers of the country.^ 

While the fact of the decline in the relative importance of the 
Steel Corporation is clear, the explanation thereof is not' so 
clear. Possibly those in charge of the Corporation, fearing 
dissolution proceedings, did not attempt to retain their original 
degree of control of the steel busi ness o f the country. The 
decision of the Circuit Court refusing fo"^nter a dissolution 
decree because the Steel Corporation had not been able to hold 
its own would appear to justify such a policy. On the other 
hand, not until after 1910 were any of the great trusts dissolved, 
and it is therefore doubtful whether fear of the law provides the 
real explanation. Possibly, to give another explanation, the 
guiding spirits of the~Sl»eL .Corporation preferred to maintain 
the prices of iron and steel productv~cven at the loss of a pro- 
portionate share in the country's growing business, — as a means 
of squeezing out the. water from the company's stock, and of 
putting it on a more secure foundation. In support of this view 
it may be said that during periods of industrial depression the 
proportion of the Corporation's output to the total was gener- 
ally smaller than its proportion of capacity, owing to its policy 
of maintaining prices. Thirdly, perlyjp*; the true eypja nation 
is the absence of any important economies in the trust form of 
organization; the sceptic would seem to find here ground for his 

» P. 62. 

' There is much testimony as to the ability of the Steel Corporation to 
eliminate its competitors. Most of the witnesses in the government suit 
agreed that the cost of converting the raw materials into the finished prod- 
ucts (conversion cost) was practically the same for the Steel Corporation as 
for the leading independent concerns. Mr. Donner, president of the Cam- 
bria Steel Company, and formerly a director of the American Tin Plate Com- 
pany, testified that in his opinion the Steel Corporation could not put its 
competitors out of business "without committing suicide/' that if the Cor- 
poration were to make prices so low that there was no profit for the Cambria 
concern, there would be nothing left for the Corporation. (Brief for 
the United States, no. 481, vol. U, Summaiy of Evidence, p. 855.) 
A mill with a capacity of 40,000 to 50,000 tons of ingots per month, 
if properly designed and operated, ought, he said, to compete with 


Even in the absence of important economies, however, a trust 
might hold its own, could it avail itself of certain props to main- 
tain its position. The Standard Oil Company, as we have seen, 
found its main strength in certain objectionable features, such 
as rebates, control of pipe-lines, and unfair selling methods. Had 

the Coiporation in any of its plants. (Ibid., p. 868.) Mr. Schwab, 
president of the Bethlehem Steel Company and formerly president of 
the Corporation itself, testified that the mill cost of the Corporation at Pitts- 
burg or Gary did not differ materially from the mill cost at Bethlehem; 
that the limit of metallurgical and mechanical possibilities had been reached, 
and that the conversion cost in all mills throughout the United States was 
practically uniform. (Ibid., p. 868.) Mr. Corey, formeriy president of the 
Corporation, declared that the cost of production at the Carnegie works was 
never materially less after the formation of the Corporation than it had been 
in 1901, at the time the Carnegie works were acquired. (Ibid., p. 869.) 
Mr. Farrell, then president of the Corporation, enumerated fourteen different 
steel companies which the Corporation could not put out of business without 
committing financial suicide. (Ibid., p. 859.) (Whatever may be the verdict 
with respect to the leading independent concerns, it is much to be doubted, 
Mr. Farrell to the contrary notwithstanding, whether some of these fourteen 
companies, such as the Wheeling Steel and Iron Company — ^with a steel ingot 
output of less than i per cent of that of the Corporation — produced on a 
large enough scale to compete effectively with the Corporation.) On the 
other hand, Mr. Campbell, president of the Youngstown Sheet and Tube 
Company, when asked whether, taking into account the extent of the ore 
holdings of the Corporation, its ownership of railroads, the extent of its 
capitalization, the character of men interested in it and their relations to 
banking circles and railroads, the Corporation had the power to put its 
competitors out of business, replied, "I think they would have the power; 
yes, sir ... I think if Judge Gary would happen to die to-night that there 
would be a good many steel people that would lie awake until his successor 
was appointed. (Ibid., pp. 850-851.) Mr. Schwab testified that it cost his 
company more to make steel rails than it did the Corporation, because his 
company did not transport its own ore. (Ibid., p. 868.) Judge Gary, the real 
bead of the Steel Corporation, testified in 1908 that the Corporation could 
produce pig iron cheaper than its competitors; that although the mill costs of 
production were about the same for the Corporation as for some of the other 
companies, yet by reason of the control of the best ores the Corporation could 
undersell them. (Ibid., p. 868.) The conclusion would seem to be that the 
Corporation by virtue of its ownership of the cream of the ore and coking 
coal lands and of the iron ore raOroads (not to mention its financial connec- 
tions) had an advantage over its competitors, but that this advantage did not 
demonstrate the superior economy of the trust form of organization. Rather 


the officials of the Steel Corporation been so minded, or did the 
nature of the business permit, the Steel Corporation might 
have followed a similar policy. But such has not been the case. 
In the first place, the Steel Corporation was not the recipient of 
rebates from the railroads. Mr. James R. Garfield testified in 
the steel dissolution case that he made an investigation of the 
relations of the railways to the Steel Corporation similar to the 
investigation made into the oil business, and he found no evi- 
dence of the Steel Corporation having received any rebates.^ 
Judge WooUey, of the District Coiut, stated that there was 
nothing in the evidence that suggested that the Steel Corporation 
used its power as a means of seciuing rebates; on the contrary 
it appeared that early in its history the Corporation promul- 
gated a rule against soliciting and accepting rebates.^ The 
contrast in this respect with the Standard Oil Company is note- 
worthy. The Steel Corporation, with its iron ore railroads, 
has not, it is true, lived up to its obligations as a common carrier, 
but the iron ore railroads cut by no means the same figure in this 
industry as do the crude oil pipe-lines in the oil industry. More- 
over, the Steel Corporation did not endeavor to coerce dealers 
or consxuners into dealing with it exclusively.* Neither did 
it resort to local price cutting as a means of restraining competi- 
tive business. Whether it would haveidone so had ciramistances 
permitted can not be said; the conditions, as a matter of fact, 
did not permit. On this point the Circuit Court said: "Under 
conditions incident to the steel trade the power of a large com- 
pany to carry on a ruinous trade war against any particular 
competitor does not exist in the iron and steel industry. The 
customers of the great steel companies are large jobbers and the 
purchasing agents of other companies, who are in the closest 

it demonstrated the many-sidedness of the trust problem and the inabOity 
to achieve results in the way of restoring competition except by the adoption 
of a legislative policy that takes into account the many favoring favors that 
lie at the basis of the apparent success achieved by some trusts. 

^ Brief for the Steel Corporation (no. 481), p. 119. 

'223 Fed. Rep. 171. See also Brief for the Steel Corporation (no. 4S1), 
pp. 1 19-120. 

• Brief for the Steel Corporation (no. 481), p. 126. 



touch with every fluctuation of the steel market. The result is 
that any eflFort on the part of any one of these great steel com- 
panies to inaugurate a trade war by ruinously underselling a 
competitor would at once, owing to the sensitiveness and inter- 
related character of the steel market, result in forcing the com- 
pany that was thus ruinously selling in any particular market or 
locality to in the same way ruinously lower its prices in every 
other community." ^ The Steel Corporati on therefore coiild not I 
wage a localized warfare against ,il&j»mpetitors/ It could, of ' 
course, have reduced the prices of articles made by certain 
competitors without reducing the prices of the articles not made 
by these competitors, and in this way have subjected these 
particular competitors to cutthroat competition. But this policy 
was not foUowed. It could also have cut prices to the bone 
everywhere, yet according to the president of the Cambria Steel 
Company this would have amounted to an act of suicide. The 
testimony is ample that the competition of the Steel Corporation, 
though vigorous, was fair, and conspicuously free from the 
brutality of which some other trusts have been found guilty.^ 
The tariff , iX is t"'^, p1ayi>H its,part. The iron and steel industry I 
has been a notable recipient of tariff favors, and the combina-l 
tions and trusts in this industry (notably the tin plate trust))/ 
have profited thereby. In fact, some of the trusts of the late 
nineties would perhaps never have been formed had it not been for 
the tariff waU, well-nigh insurmoim table to foreign competitors. 
But certainly the tariff was not the mother of the steel trust of 
1901; by that time the duty had become nominal. After the 
removal of the duties from iron and steel products by the Sim- 
mons-Underwood bill of 1913, the Steel Corporation for the most 
part stood on its own feet, unsupported by legislative props,' 
save, of course, such artificial support as was involved in the 

* 223 Fed. Rep. 77. 

* On this point, see the testimony of competitors abstracted in the Brief for 
the Steel Corporation (no. 481), pp. 122-124. 

' Not all iron and steel products were placed on the free list. Thus, the 
duty on tubes and pipes was made 20 per cent ad valorem; on tin plate 1 5 per 
cent; and on structural shapes 10 per cent. Taussig, Tariff History of the 
United States (6th edition), p. 441. 




failure of the government to prevent the Corporation trom 
acquiring a semi-mo nopoly of the best iron ore deposits, and from 
utilizing its iron ore railroads to~&e detriment of its competitors, 
— subjects to which we now turn. 

In view of the fact that the Steel Corporation was losing its 
hold on the industry, one might have concluded that the wise 
public policy would have been that of "watchful waiting," that 
the steel trust in time would disintegrate by virtue of its very 
tmwieldiness. This may prove to be the outcome, yet it must 
be remembered that the Steel Corporation is unusually well 
intrenched in the matter of the essential natural resources. The 
important elements which go into the manufacture of pig iron 
(the foimdation of the steel manufacture) are iron ore, cok ing j 
coaly ^hbA limestone. Of these the iron ore is the most important^ i 
and the Steel Corporation in 191 1, when the Report ot ^S^ 
Conmiissioner of Corporations was pubUshed, held approxi- 
mately 75 per cent of all the commercially available iron ore of j 
the Lake Superior district, the ore of this district being the basis 
of the iron and steel industry of the country.^ (About 85 
per cent of the country's output of iron ore came at that 
time from the Lake Superior district.) In addition, the Steel 
Corporation owned immense deposits of iron ore in the South 
and in other sections, even including deposits in Cuba. Mr. 
Gary, the chairman of the Steel Corporation, admitted in his 
testimony before the House Ways and Means Committee in 
1908 that the Corporation practically controlled the ultimate ore 
supply of the country.^ 

The testimony of Mr. Schwab before the Stanley Committee 
is also significant. Mr. Schwab gave it as his opinion that there 
would not be any great development in the iron and steel b\isi- 
ness by new enterprises, because of the dfficulty of securing a 
sufficiently large supply of raw mateHal. Only a concern possess- 
ing a large reserve of ore could afford to make the large invest- 
ment required to produce iron and steel economically, and the 

* Report of the Commissioner of Corporations, part I, p. 59. 
'House Document no. 1505, 60th Cong., 2nd Sess., p. 1752. 


greater part of the ore on this continent was already owned or 
leased by existing companies.^ 

The dominating^gositi.QD of fhp Steel Corpora tion in the ore 
industry was heightened through its ownership of iron ore rail- 
roads. The Steel Corporation owned the Duluth and Iron 
Range, and the Duluth, Missabe and Northern, the two most 
important ore roads in the Lake Superior region.^ The freight 
rates charged by these roads were very high, their operating 
expenses were very low (the operating ratio in 1910 was 36.5 per 
cent for one and below 30 per cent for the other, against an 
average of 66 per cent for the whole coimtry); and as a result 
these ore roads were immensely profitable.' In 191 1 a con- 
siderable reduction in the rates on iron ore was made by the 
carriers, but, according to the Commissioner of Corporations, 
they were still excessive.^ These high rates not only contributed 
greatly to the enormous earnings of the Steel Corporation, but 
they imposed a burden on such of its competitors as were obliged 
to ship their ore over these roads, — ^for none of the competitors 
of the Corporation owned any railroads carrying iron ore from 
the ore fields to the Lake ports. This situation would seem to 
have called for the appUcation of the principle of the commodity 
clause; the interests of the public would seem to have required 
that the Steel Corporation divest itself of its iron ore railroads, 
and thus remove the inducement which they had to restrain the 
independent operations by means of excessive freight rates and 
discrimination in service. 

After the report of the Bureau of Corporations was published, 
the Steel Corporation cancelled the lease it held of the valuable 
ore lands of the Great Northern Railway system. This lease had 
been made in 1907 in order to prevent any one else making use 
of these ore lands (the imusually high rate of royalty leads to 

* Brief for the United States (no. 6214), part I, p. 390. 

' These two roads handled about two-thirds of the total ore traffic of the 
Lake Superior district. Brief for the United States (no. 481), vol. I, pp. 

* Rqx>rt of the Commissioner of Corporadons, part I, pp. 374-375< 

* Ibid., part III, p. 506. A further reduction was ordered in 191 5 by the 
Interstate C(»nmerce Commission. 33 I. C. C. Reports 541. 


this conclusion).^ It was provided that the lease might be can- 
celled by the Steel Corporation on January i, 1915, upon giving 
two years' notice. On October 17, 1911, the Finance Committee 
of the Steel. Corporation, influenced possibly by the prospect of 
the filing of a government bill — one was filed on October 26 — 
decided to cancel the lease on January i, 1915.^ This action 
opened up a large supply of excellent ore, which might be made 
use of by independent operations. 
^ But of more importance as bearing on the ability of the Steel 
Corporation to effect a monopoly because of a control of the iron 
ore is the fact that the high class Lake Superior ores owned by 
the Steel Corporation have become less and less the basis of the 
steel industry. New fields were developed, and ores which a few 
years ago were regarded as unusable can now be worked under 
the improved methods in vogue. The Bethlehem Steel Com- 
pany, for example, gets its iron ore from the Adirondack moun- 
tains in New York, from Sweden, Chili, and Cuba.' This 
company and other tidewater concerns became entirely inde- 
pendent of Lake Superior ore, and after the passage of the 
Sinmions-Underwood bill were not hampered by a duty on 
foreign ore. The Colorado Fuel and Iron Company has its ore in 
Wyoming, New Mexico, and Utah; and is also independent of 
Lake Superior ore. Present indications, therefore, are that the 
establishment of a trust based on control of the iron ore will 
prove futile because of new discoveries and improved methods.* 
And such may in other industries frequently prove to be the 
case. But certainly this will not be true of all industries, and 
therefore a definite, farsighted policy with respect to our natural 
resources would seem to be but the part of wisdom. 

1 For an opposing view, see Brief for the Steel Corporation (no. 481), 
p. 168. 
' Brief for the United States (no. 6214), part 11, pp. 66, 80. 

* Moreover, new deposits in the Lake Superior district were discovered, 
thus reducing the Corporation's percentage of the total. See Brief for the 
Steel Corporation (no. 481), pp. 32-33. 

* According to the Steel Corporation its ore holdings in the Lake Superior 
district amount to less than 45.6 per cent of the known and devel(^)ed 
ores of the first quality. Brief for the Steel Corporation (no. 481), p. 291. 



The foregoing considerations, however, relate to the future. 
Competition in production continues quite active, and the 
independents are steadily growing in strength and importance. 
Yet this competition has not made itself felt fully with respect 
to prices; competition in jdces has been materially restrained by 
various means, — spools, trade meetings, and dinners.* At the 
time of the organization of the Steel Corporation and for several 
years thereafter a nimiber of the constituent companies of the 
Corporation allotted trade and fixed prices by means of pooling 
agreements.^ In the year 1904 the president of the Corporation 
ordered the subsidiaries to withdraw from these pools. Never- 
theless shortly thereafter representatives of the same concerns 
that had been parties to the pools held trade meetings, and at 
these meetings there were reached imderstandings with respect 
to prices by means of which the price level was maintained as 
effectually as imder the agreements.' The legality of these 
meetings was questioned, and in 1907 they were abandoned.^ 
They were soon followed, however, by the famous Gary dinners, 
— another device for substituting cooperation for competition 
as a regulator of pdces. 

The first of these dinners was held in New York City on No- 
vember 20, 1907.^ The panic of October, 1907, had demoralized 
the steel trade, and the dinner was held to discuss the proper 
method of handling the situation. There were present a number 
of manufacturers of iron and steel, controlling among them at 
least 90 per cent of the trade.* Mr. Gary, in his testimony in the 
government suit, explained the reason for holding the dinner. 
"My purpose was ... to prevent the demoralization of busi- 
ness, to maintain so far as practicable the stability of business 

* Tabks showing the prices of iron and steel products from 1 895-1913 may 
be found in Brief for the United States (no. 481), vol. II, pp. 1037-1085. 

' 223 Fed. Rep. 173. See also Brief for the Steel Corporation (no. 481), 
p. 208. 

• 223 Fed. Rep. 173. 

*Ibid. According to the Brief for the Steel Corporation (no. 481), 
p. 219, they were abandoned in October, 1906. 
' Brief for the United States (no. 6214), part 11, p. 146. 
•Ibid., p. 147. 



and to prevent, if I could, not by agreement, but by exhortation, 
the wide and sudden fluctuation of prices whi ch would be in- 
jurious to everyone interested in the business of the iron and 
steel manufacturers." ^ 

This '* exhortation " to his feUow-manufacturers was supported 
by an elaborate scheme for controlling prices. As a result of the 
dinner a general Advisory Committee of five members was 
appointed, Mr. Gary being chairman.^ This committee was 
empowered to appoint sub-conmiittees; and it did appoint nine 
such committees, one on ore and pig iron, another on rails and 
billets, and so on. The Steel Corporation was well represented 
on these committees, having two representatives on the General 
Committee, and one representative on each of the nine sub- 
conunittees.' The sub-committees held meetings in various, 
parts of the country with more or less regularity for several 
months. The president of the Youngstown Sheet and Tube 
Company was made a member of the sub-committee on sheets 
and plates. He testified in the government suit that shortly after 
the dinner of November 20, 1907, he attended a meeting in 
Pittsburg of the manufacturers of tin plate and sheet steel, at 
which there were present 90 per cent of the manufacturers of 
sheet steel; that this meeting was an outgrowth of the first Gary 
dinner; and that at this meeting each manufacturer was ques- 
tioned in regard to his percentage of the business, and his mill 
operations.* When the maintenance of the market prices was 
discussed, what was in mind was the prices published by the 
subsidiaries of the Steel Corporation. He further testified that, 
when he was chairman of a sub-committee meeting, he would ask 
those present to state whether they thought the price was too 
high, or whether it was too low, and that, when a consensus of 
opinion had been reached, he would call on each one to state 
what policy he would follow with respect to prices.* He made it 
clear to the members that agreements were illegal; and that there 
would be no agreement, no penalties, and no restriction of out- 

* Brief for the United States (no. 6214) » part II, p. 149. 

* Ibid., p. 147. * Ibid., p. 151. 
» Ibid., p 150. » Ibid., p. 152. 


put. But in response to inquiry from the government examiner 
he stated that he thought that there was a general understand- 
ing " that their policy would be to market their product at the 
then prevailing price until they notified their competitors that 
they wanted to change their price." ^ The witness also attended 
the meetings of the tube manufacturers and of the manufacturers 
of billets and sheet bars, and they were conducted on substan- 
tially the same basis. The president of the McKeesport Tin 
Plate Company admitted that the effect of the meetings was to 
maintain a steady price, and that after prices were announced he 
would feel under a moral obligation to sell at that price until he 
notified his competitors of an intention to change.^ Much 
additional testimony might be cited; but the foUowing excerpt 
from the testimony of the president of the Steel Corporation 
jfrom 1903 to December 31, 1910, will suffice: 

"Q. State whether or not it was the purpose, in the creation 
of these sub-committees to reach a general understanding as to 
prices of iron and steel products and to bring about the main- 
tenance of them. 

The Witness. Yes. 

Q. Were there understandings as to what those prices would 

The Witness. There were. 

Q. Were the prices maintained or not as a result of those 

The Witness. They were." ' 

It seems clear that through the General Committee and the 
sub-committees the manufacturers of steel co5perated, not only 
in maintaining the market price, but also in making the market 
price identical with that quoted by the subsidiaries of the Steel 

In February, 1909, this policy of cooperation was temporarily 
abandoned. Business had so decUned in volume that the inde- 
pendents refused to abide by the "understandings," and sold at 

* Brief for the United States (no. 6214), part II, p. 153. 

« Ibid., p. 168. 

' Ibid., pp. 168-169/ 


prices determined by themselves.* The Steel Corporation 
attempted for a time to maintain prices by itself, but soon aban- 
doned the attempt, and established an open market in steel 
products, except in rails.^ In October, 1909, the meetings of the 
steel manufacturers at luncheons and dinners were resimied, and 
the result was the restoration of the policy of co(^>eration.' In 
the fall of 1910 and the early part of 191 1 there were further 
meetings of the officials of the Steel Corporation with the other 
steel manufacturers. 

Fortunately the speeches made at the dinner of Jamiary 11, 
191 1, have been preserved, and these clearly show the workings 
of the Gary dinners. In his speech Mr. Gary said in part: 

"We have something better to guide and control us in our 
business methods than a contract which dep>ends upon writt^i 
or verbal promises with a penalty attached. We, as men, as 
gentlemen, as friends, as neighbors, having been in close com- 
munication and contact during the last few years, have reached 
a point where we entertain for one another respect and affec- 
tionate regard. We have reached a position so high in our lines 
of activity that we are bound to protect one another; and when a 
man reaches a position where his honor is at stake, where even 
more than life itself is concerned, where he can not act or fail to 
act except with a distinct and clear understanding that his honor 
is involved, then he has reached a position that is more binding 
on him than any written or verbal contract.*' * 

In his speech Mr. Gary further said that in his opinion it 
would be a mistake to reduce prices at that time. At this same 
dinner a representative of Jones and Laughlin said in part, "I 
hope it will be the consensus of opinion here to-night that we will 
maintain the present prices." ^ The president of the Ashland 
Steel Company said that so far as his company was concerned, 
"we are ready and willing to still co(^)erate to do what we can to 

* 223 Fed. Rep. 175. 

' Brief for the United States (no. 6214), part II, p. 200. 
' Ibid., p. 207. 

* Ibid., (no. 481), vol. II, pp. 989-990. 
» Ibid., p. 993. 


maintain prices." ^ Mr. Gary, during the course of the dinner, 
called on practically all of the leading steel manufacturers, and 
each, almost without exception, expressed himself as in favor of 
maintaining the existing prices, or as ready to support the 
co<^)erative movement with respect to prices. 

Whether as a result of the investigation of the Stanley Com- 
mittee of the House of Representatives or in anticipation of the 
government suit, the Gary dinners came to an end in 191 1, and 
judging from the movement of prices, the co5p>erative arrange- 
ment was given up. With respect to these dinners the Stanley 
Conmiittee said: 

^' We think the conclusion is irresistible that the Gary dinners 
were instituted as a means of conve3dng to the entire iron and 
steel industry information as to what the attitude of the United 
States Steel Corporation was upon the questions of output and 
prices and of impressing upon all engaged in the industry that 
it was the part of wisdom and prudence to govern, themselves 
accordingly. We further believe that by this means prices were 
maintained, output restricted, competition stifled, and trade 
restrained, just as certainly, just as effectively, and just as 
unlawfuUy as had been done under the discarded pooling agree- 
ments of former years." * 

Perhaps the best evidence of the success of the policy of \ 
co5peration, promoted by pools and dinners, is the coiurse of the 
price of Bessemer steel rails. From 1867 to 1900 (the year before i 
the formaticm of the steel trust) the price of steel rails varied f 
every year; in no two years during all this period did it continue 
the same.' Prior to the formation of the Steel Corporation there 
was severe competition in steel rails, and the price fell from $28 
per ton in 1896 to $17 per ton in 1898. A combination then 
raised the price for a time to $35, but early in 1901 it went as low 
as $26. In April, 1901, the Steel Corporation began operations; 
in May the price of rails was fixed at $28 per ton; and the price 
remained at that figure up to the date of the government suit, 

1 Brief for the United States (no. 481), vol. II, p. 998. 

* Stanley Committee Rqx>rt, p. 1 26. 

* Brief for the United States (no. 6214), part I, p. 13. 


having been effectively controlled by the Steel Corporation in 
cooperation with the independent sleel manufacturers. This 
price of $28, it may be noted, was some $10 per ton higher than 
the prices that prevailed during 1897-1898, when there was 
competition between the Carnegie Steel Company and the 
Illinois Steel Company; though the prices of 1897-1898 )delded 
these companies a substantial profit.^ The ability of the Steel 
Corporation to maintain the price of steel rails at an arbitrary 
figure, despite marked fluctuations in demand ^ and in manufac- 
turing costs, abundantly testifies to the tremendous power of this 
mammoth organization. 

* Brief for the United States (no. 481), vol. I, p. 169. 

' In 1901, 99.9 per cent of the rails sold were Bessemer rails. Since than 
date Bessemer rails have been largely superseded by open-hearth rails. In 
191 2 only one-third of the rails sold were Bessemer rails. Brief for the 
Steel Corporation (no. 481), p. 215. 



The International Harvester Company — the harvester trust — 
was erganizedjn New J ejypy nn Angnst 12, 1902. It represented 
a consolidation of the five leading manufacturer^ of harvesting 
machines, — the McCormick Harvesting Machine Company 
(with a factory at Chicago), the Deering Harvester Company 
(with a factory at Chicago), the Warder, Bushnell and Glessner 
Company (with a factory at Springfield, Ohio), the Piano Manu- 
facturing Company with a factory at Piano, Illinois (near 
Chicago), and the Milwaukee Harvester Company (with a 
factory at Milwaukee).* The five plants of these companies, 
according to an official statement, were the largest and most 
complete of their kind in the world.^ Among them they pro- 
duced approximately 85 per cent of the total output of harvesting 
machines in the United States.* Their control of the harvester 
trade in the territory adjacent to them (the great grain growing 
states of the country) was even greater than 85 per cent, since ^^ ' 

the leading competitors of the trust were located in New York \ 

> On the International Harvester Company see: Report of the Commis- 
sbner of Corporations on the International Harvester Company, March 3, 
1913; Report of the Federal Trade Commission on the Causes of High Prices 
of Farm Implements, May 4, 1920; Brief for the United States in Interna- 
tional Harvester Company v. United States (no. 757); Brief for the 
International Harvester Company (no. 757); Brief for the United States in 
International Harvester Company v. United States (no. 56); Brief for the In- 
ternational Harvester Company (no. 56); Appendix to defendant's brief in 
United States v. International Harvester Company (no. 624); 237 Missouri 
Reports 369-424; 234 U. S. 199-215; 214 Fed. Rep. 987-1012. 

' Report of the Conamissioner of Corporations on the International Har- 
vester Company, p. 67. Hereafter referred to as Report on the International 
Harvester Company. 

» Chnm., 75, p. 345 (August 16, 1902). 

* Report on the International Harvester Company, p. 67. 



State, with a market largely confined to the North Atlantic 
states and to foreign countries. 

Prior to the organization of the International Harvester 
Company competitive conditions had prevailed in the manufac- 
ture of harvesting machines. Notable improvements in the ^ 
manufacturing processes, combined with a steady increase in the 
size of the factories, had led to marked economies in production; 
and these in turn, owing to competition, had led to considerable 
price reductions. At various periods during the eightieS the 
manufacturers had endeavored, through price agreements, to 
hold competition in check, but without marked success. In 
1887 and again in 1890 attempts had been made to form a com- 
bination of the leading manufacturers, and in 1890 a company 
had actually been chartered for that purpose; but in both in- 
stances the plan had fallen through. From 1890 until the 
organization of the International Harvester Company in 1903 
apparently no attempt had been made to effect a consolidation. 
Competition, generally speaking, had been quite active. In fact 
the organizers of the International Harvester Company subse- 
quently claimed that it was the severity of competition that 
made a combination necessary. The president of the Inter- 
national Harvester Company characterized the competition as 
fierce; list prices could not be maintained.* Mr. Glessner, of 
Warder, Bushnell and Glessner, expressed the opinion that "in 
the harvester business there was a competition never known in 
any other business in the world." * Mr. Jones, of the Piano 
Manufacturing Company, testified that competition was so 
severe that neither the manufacturers nor the dealers were 
making anything.' Moreover, the Commissioner ^ho heard 
the testimony in a suit in a Missouri court described the compe- 
tition as "active, persistent, strenuous, and fierce." * 

TTie claim that the formation of a harvester trust was neces- 
sary to avoid ruinous competition was analyzed by the Bureau of • 

' Report on the International Harvester Company, p. 59. 

* Ibid., p. 60. 
•Ibid., p. 61. 

* 237 Missouri Reports 3S4. 


Corporations in its investigation of the International Harvester 
Company. "There is no doubt" said the Bureau, "that the 
principal motive for the formation of the International Harvester 
Co. was to eliminate competition and to secure a dominant posi- 
tion in the trade." ^ Tliough the desire to eliminate competition 
kd to the organization of the trust, yet competition was not so 
severe, in the opinion of the Bureau, as to make the formation of 
a trust necessary. Most of the larger companies, it reported, had 
been making considerable profits, and sometimes very large 
profits.^ Specific information as to the profits of the harvester 
companies prior to 1902 was difficult to obtain, and such data as 
was gathered by the Bureau related only to the five companies 
which united to form the trust. But these five companies, as has 
been pointed out, included the five leading manufacturers, and 
produced over four-fifths of the total output Such data as was 
available showed that in general the profits of the large com- 
panies had been quite high during the five years preceding the 
oilganization of the International Harvester Company. The 
Piano Manufacturing Company, it is true, had sustained a 
deficit in both 1900 and 1901, and the profits of the Milwaukee 
Company had been low in 1901; but the profits of the McCor- 
mick and Deering companies had been high in every one of the 
five years, and the profits of the Milwaukee Company and of 
Warder, Bushnell and Glessner (the Champion Company) had 
generally been high.' It is significant that in three of the five 
years for which the profits were shown the aggregate aimual 
profit oi the' five competing companies was greater than the 
rqx)rted profit of the trust during any one of the first six years 
of its existence, and this notwithstanding the fact Jhat the 
period after 1902 was one of great prosperity.^ It is also signi- 
ficant that a committee appointed to consider the taking over of 

' Report on the International Harvester Company^ p. 70. 

> Ibid., p. 63. 

» IWd., p. 63. 

^Ibid., p. 64. A possible explanation of the low "reported" profit of 
the trust is the large amount of earnings put back into the business, es- 
pedally in tew lines and in plants abroad. 


the business of the five companies which combined to form the 
trust reported that each of these companies had for several years 
enjoyed a "prosperous, profitable and growing business." ^ In 
addition, the McCormick and Deering companies, especially, 
had been increasing their business rapidly prior to the merger.* 
The Bureau by way of conclusion said: "This large increase in 
the volume of business taken in connection with the compara- 
tively high rates of profits earned on the capital invested is strong 
evidence of the fact that the companies which originally formed 
the International Harvester Co. were generally not suffering 
from excessive competition. The combination, therefore, can 
not be justified on the principle of self-preservation,'* ^ 

TTie argument most frequently advan ced in favo r ^^ trw^f^ is 
that th ev make possible econom ies, not otherwise realizable. 
But-^ the Bureau of Corporations claims — the expectation 
of reducing costs was only a secondary motive in the oiganiza- 
tion of the harvester trust.* This matter will be considered in 
more detail later on in this chapter, but at this point it may be 
stated that the International Company did effect a high jegree 
of integration. Through its constituent companies it acquired 
coal lands, iron ore properties, iron and steel plants, timber lands, 
and saw mills. By supplying itself with its chief raw materials at 
cost, the company not only had an assured supply, but kept for 
itself the profits that otherwise would have gone to other con- 
cerns. (This assumes that the company could produce its steel, 
for example, cheaper than it could buy it from the steel trust, an 
assumption apparently justified in view of the fact that the 
company continued to make its own steel.) With the manu- 
facturing properties also went binder twine mills and several 
industrial railroads. The McCormick concern owned the 

* Brief for the United States (no. 56), pp. 18-19. 

' Between 1899 and 1902 the assets of the McCormick Company increased 
from $12 million to $50 million, all from earnings. Its sales of the principal 
harvesting machines increased from 371,312 in 1900 to 503,517 in 1902; and 
the Deering Company's sales increased during the same period from 281,574 
to 370,107. Brief for the United States (no. 56), p. 8. 

* Report on the International Harvester Company, p. 66. 

* Ibid., p. 70. 


Illinois Northern Railway, a short line connecting the McCor- 
mick plant and other industrial enterprises with several railroads 
entering Chicago; and the Piano concern owned the Chicago, 
West Pullman and Southern Railway. 

A nother motive in the organization of the IiAemational 
Harvester Company was the prn^ntmn nf thp ex port trade in 
agricultura l imp lements. It was claimed on behalf of the com- 
pany that none of the companies then in the business had suffi- 
cient capital and credit to develop the foreign trade adequately, 
or had sufficient trained harvester men to create an organization \ 
that would effectively cover the foreign field. ^ The foreign trade 
argument, it may be noted, is often cited as a justification for the 
trust. Just what importance this factor played here is hard 
to say. The testimony of the president of the International 
Harvester Company shows that the five companies that entered 
the trust had already built up a very large export business; and 
this was true, also, of the four independent harvester companies 
in New York state. ^ As a matter of fact, American harvesting 
machines were then being marketed all over the world. After 
the International Harvester Company was organized, the foreign 
trade, it is true, was much extended, yet whether this resulted 
from the organization of the trust or whether it would have come 
about anyhow is something on which it is difficult to pass judg- 
ment — ^is, in the words of Judge Smith, "a mere matter of 

Still another motive for the formation of trusts is the profit j 
obtained by the promoters.^ The bankers who promoted the "^ 

trvesier trust received $3,148,197 in stock for the Milwaukee 
Harvester Company, — one of the five original companies. This 
sum seems to have represented the value of the property con- 
veyed. In addition they received $2,957,143 in stock for their 
services as promoters, this sum being over and above all expenses 

> Brief for the Tntemational Harvester Company (no. 56), pp. 55-56. 
See also p. 525. 

* Report on the International Harvester Company, pp. 71-72. 

* 214 Fed. Rep. 993. 

* Cf. pp. 293 acq. 


incurred in the formation of the Harvester Company. This 
payment of abnost $3,000,000, in the opinion of the Bureau of 
Corporations, was excessive. To the extent that it was excessive 
it served as an inducement for the promoters to form the trust. 
But undoubtedly it would be a mistake to attach much impor- 
tance to this factor in endeavoring to explain the organization 
of the International Harvester Company. 

The formation of the Interiiational Harvester tompany was 
noteworthy for the absence of any important overcapitalization. 
At its oiganization the company had a capital of $120,000,000, 
all conmion stock (no bonds). Without going into the financial 
details of the promotion, half of the stock ($60,000,000) was 
issued for cash, which was to constitute working capital; and the 
other half was issued for the properties acquired and for bankers' 
conmiissions.^ Whether there was any overcapitalization 
depended therefore on whether the properties acquired were 
worth $60,000,000. The organizers appraised the value of the 
property at approximately $67,000,000, not counting good will, 
and the company claimed, therefore, that it commenced opera- 
tions with a surplus of $7,000,000.* The Bureau, however, 
regarded the appraisal value as excessive. Though it found it 
difficult to arrive at an accurate valuation because of the fact 
that the records of the company were not well kept,and because 
in some instances the company denied access to the records, 
nevertheless the Bureau felt that a fair valuation would be about 
$49,000,000, not including the good will.* In the opinion of the 
Bureau, the diflFerence between $60,000,000 and $49,000,000 
must be "egarded as having been issued for good will and promo- 
tion services. But there can be no doubt that a substantial 
amount of good will was brought into the merger, quite apart 
from any so-called merger value. It follows, therefore, that if 
the International Harvester Company was overcapitalized, it 

^ Report on the International Harvester Company, p. 86. 

• Ibid., p. 95. See also Report of the International Harvester Company 
for 1907, in Chron., 86, pp. 1471-1474. 

' Report on the International Harvester Company, pp. 94, 96, 
1 25. 


was only to a slight degree. This variation from the customary 
practice is perhaps to be explained partly by the stock market 
conditions in 1902, and partly by the fact that the constituent 
companies were for the most part close corporations. The 
McCormick family alone received 42.6 per cent of the stock of 
the International Company, and the Deering family received 
34.4 per cent These two groups between them, therefore, re- 
ceived 77 per cent of the total capitalization, and were thus in 
full control. 

After its organization the International Harvester Company 
acquired a number of competing enterprises. In 1903 it pur- 
chased D. M. Osborne and Company, the leading independent 
concern.^ This company had its plant at Auburn, New York, 
and was thus in a favorable position to compete for the export 
trade. Its chief product was harvesting machines, but it also 
manufactured tillage implements and binder twine. As part of 
the terms of the sale the two leading active stockholders of the 
Osborne concern agreed that for a period of ten years they would 
not engage in the business in the United States (except in Ari- 
zona and New Mexico), Europe (except Belgium and Holland), 
South America, or Australia, thus evidencing the monopolistic 
purpose of the International Harvester Company. During 
1903 and 1904 the purchase of the Osborne concern was kept 
secret. This was at the request of the Osborne Company, in 
order to enable it to collect its bills receivable.^ During this 
period an official of the Osborne Company made affidavits, as 
required by the anti-trust laws of the state of Missouri, that the 
company was not a party to any agreement or combination to 
fix prices or output, and that it had not entered into any arrange- 
ment which in any way tended to interfere with full and free 
competition in the manufacture and sale of its products.^ 

During 1903-1904 some of the stockholders of the Inter- 
national Harvester Company acquired the Minnie Harvester 
Company, the Aultmann-Miller Company, and the Keystone 

' Report on the International Harvester Company, p. 137. 

• Brief for the International Harvester Company (no. 757), p. 38. 

' Rqx>rt on the International Harvester Company, p. 296. 


Company. These three companies were competitors of the 
International Company, and were acquired — the Bureau be- 
lieved — ^largely, if not almost wholly, for the purpose of elimi- 
nating their competition.^ In each case the control was kept 
secret, and the companies passed as independents. In 1905 these 
three companies (and the Osborne Company) were transferred to 
the International Company, apparently as the result of a change 
of policy on the part of the management. Thereupon the pro- 
duction of binders at these three plants was discontinued, and 
the plants were used to manufacture binder twine, auto buggies, 

1 trucks, and other lines. 

Y> The International Harvester Company also endeavored to 
extend its control to other lines of farm machinery, — lines not 
competing with harvesting machines. In 1904 some of the stock- 
holders of the company secured control of the Weber Wagon 
Company; and in 1905 the property of this company was trans- 
ferred to the International. The Weber concern occupied a very 
important position in the farm wagon trade; and through it and 
the later extension of its business the International Harvester 
Company became one of the leaders in this line. 
^ In 1906 the International Company acquired a manure 
spreader plant, and subsequently it attained a commanding 
position in this branch also. The company, in addition, became 
the selling agent for a niunber of concerns making plows, seeding 
machines, etc., and in this way broadened its interest in the 
farm machinery trade. 

The company also developed the new lines at its old plants. 
Thus, at the Milwaukee plant the manufacture of gasoline 
engines, cream separators, and tractors was begim in 1904, 1905, 
and 1909, resp)ectively. The brands formerly made at the Mfl- 
waukee plant were thereafter made at the McCormick works. 
Likewise the Piano plant ceased manufacturing harvesters — the 
brands formerly turned out there were thenceforth manufac- 
tured at the Deering plant — and in 1905 and 1906 commenced 
the manufacture of manure spreaders and wagons. The Cham- 
pion plant continued to make harvesting machines, but it added 
* Rq>ort on the International Harvester Company, p. 141. 

THE International HAkvEstER company 239 

hay tools in 1903, seeders in 1906, and manure spreaders in 1908. 
In 1910 a large tractor works was opened in Chicago. This 
was the only important new plant for the manufacture of agri- 
cultural implements constructed by the company in the United 

From the sales end this extension into new lines was quite 
advantageous. The sales of harvesting machines in any given 
territory are generally made within a comparatively short period 
in each year. The sales force in the past had been employed for 
only a few months during each year, and it had then been dis- 
banded.^ The extension of the business to include agricultural 
implements used at different seasons of the year made it possible 
to sustain an all-year-round selling organization, thus contribut- 
ing decidedly to its efliciency. 

The Harvester Company also strengthened its position in fhe 
export trade. This it did by the purchase of foreign companies, 
or by the construction of plants abroad. For example, in 1903 
the International Harvester Company of Canada was incor- 
porated. It built a large harvester factory at Hamilton, On- 
tario, and subsequently added tillage implements, seeders, and 
manure spreaders. Other smaller plants were likewise acquired 
in Canada. The Harvester Company also built or acquired 
plants in France, Germany, Russia, and Sweden, and organized 
marketing companies in a number of other countries. The 
establishment of these factories abroad was chiefly the result 
of the protective poUcy of these foreign countries. Generally 
speaking, it proved more profitable for the International Har- 
vester Company to manufacture the machines abroad (thus 
saving the tariff duty) than to make them in this country and 
export them. Obviously there was a great saving in transporta- 
tion charges as well, though this saving was offset in part, at 
least, by the greater cost of production in the foreign plants, the 
industry being one particularly suitable to this coimtry, and one 
in which the economies of large-scale production are great. 

In 1913 there was made an important reorganization directly 
affecting the newly acquired lines and the foreign business. On 
" Brief for the International Harvester Company (no. 757), p. 6i. 


account of the suit brought by the government to effect the 
dissolution of the International Harvester Company on the 
ground that it was a combination in restraint of trade, the board 
of directors organized in the state of New Jersey on January 27 
a new company, called the International Harvester Corpora- 
tion.* To the Corporation were transferred all the domestic 
plants exclusively engaged in the manufacture of the "new 
lines," all the foreign plants, and all the transportation com- 
panies.^ The capitalization of the Corporation consisted of 
$30,000,000 preferred stock and $40,000,000 common. This, it 
may be noted, represented just half the total of each class of 
stock of the International Harvester Company. The Company, 
starting out with a capital of $120,000,000, all common, had in 
1907 converted half of the common into preferred. In 1910 it 
had declared a 33 1/3 per cent common stock dividend, thus 
increasing its total capitaUzation to $140,000,000. Because of 
the organization of the Corporation with a capital of $70,000,000, 
the Company reduced its capital from $140,000,000 to $70,000,- 
000, and changed its name to the International Harvester Com- 
i pany of New Jersey,^ 

This plan of dissolution was approved by the stockholders in 
February, 1913. Of this plan the Bureau said: "If intended as a 
part of a proposed plan of disintegration, the Bureau regards 
this method of division as very unsatisfactory. Obviously, it 
does not touch the most essential feature of the company as a 
combination of competitors, namely, the consolidation of the 
chief harvesting-machine plants of the country, and especially of 
the McCormick, Deering, Champion, and Osborne works." * 
In this connection mention may be made of another company, 
which is liable to be confused with one or the other of the 
foregoing companies. This is the International Harvester Com- 

* Chron., 96, p. 365 (February i, 1913). 

* Report on the International Harvester Company, pp. 169, 174. 

■ Holders of the $70,000,000 cancelled stock were entitled to receive cash 
($100 per share) or shares in the corre^wnding class of security of the Corpo- 

* Report on the International Harvester Company, p. 178. 


pany of America, In the original merger the International 
Harvester Company did not acquire the stocks of the companies 
combined; it merely acquired their properties. But a few weeks 
later it did acquire the capital stock of the Milwaukee Har- 
vester Company, and with it its charter.^ The stock of 
this company, as distinguished from its factory (which had 
already been acquired), was secured in order that the company 
might be employed as a selling agency, and thus reUeve the 
International Harvester Company of the restrictions that it was 
likely to meet in the conduct of business in other states. Thus, 
the laws of some states excluded corporations with a capital as 
large as that of the International Harvester Company, and the 
laws of others, while admitting foreign corporations (that is, 
corporations chartered outside the state), subjected them to 
heavy taxation, and sometimes, if they were trusts, refused to 
license them. ^The International Harvester Company, being a 
new corporation, would doubtless have experienced some delay 
in securing Ucenses in the several states; it might have been 
denied a license in others on the ground that it was a trust; 
and it would probably have been subject to heavy taxation, 
since the laws of some states made the amount of capitalization 
the basis of taxation. The Milwaukee Harvester Company, 
however, already had licenses to do business in the several states, 
and it was thus well suited to serve as a selling agency. The 
International Harvester Company, therefore, transferred to the 
Milwaukee Harvester Company (the name of yrhich was changed 
in September, 1902, to the International Harvester Company of 
America) practically all of its warehouses and other faciUties for 
the sale of its machines, and constituted it its sole selling agent.^ 
The International Harvester Company (of New Jersey), through 
the ownership of all of the capital stock of the International 
Harvester Company of America, of course controlled its seUing 
agent completely.* 

' Report on the International Harvester Company, p. 87. 
*Ibid., p. 90, and 237 Missouri Reports 383. 

' The use of the International Harvester Company of America as a selling 
agency was held by the Supreme Court of Missoiui to be in violation of the 


The International Harvester Company at its organization 
produced, as we have seen, about 8$ per cent of the country's 
output of harvesting machines. This figure is not exact, since 
the number of each type of harvesting machines produced by the 
independent concerns is not known. However, reasonably com- 
plete data for grain binders, mowers, and rakes — ^three of the 
most important machines — are available, and especially for the 
first two. We may therefore turn to an examination of the 
position of the International Harvester Company in these lead- 
ing branches of the industry. 

TTie number of each of these machines sold in 1902 by the 
trust and by the independents, with percentages, is shown in the 
following table.^ 

IfUemational Harvester Co' 

Independent concerns 

No. sold » 

Per cent 

No. sold » 


Grain binders 




81,376 * 




The trust, it appears, sold over ninety per cent of the binders, 
over eighty per cent of the mowers, and nearly seventy per cent 
of the rakes. These figures, it should be noted, are for the total 
sales of each group, including the export trade. Inasmuch as the 
independent binder concerns had a relatively large export trade, 
the International Harvester Company undoubtedly controlled a 
larger percentage of the domestic market than the figure for 

state law forbidding a company with a capital as large as that of the Interna- 
tional Harvester Company to obtain a license, and a fine and ouster (sus- 
pended conditionaUy), was ordered. 237 Missouri Reports 374, 398. This 
decree was affirmed by the Supreme Court of the United States. 234 
U. S. 215. 

^ Report on the International Harvester Company, p. 92. 

* Number produced in the case of the Milwaukee Harvester Company. 

• Number pnxluced in the case of the Osborne Company. 
^ Number for independents partly estimated. 



total sales (90.9 per cent) would indicate. The same is true to a 
lesser degree of mowers also. 

Similar statistics are not available for reapers or com bind- 
ers — other important types of harvesting machines — ^yet in all 
probability the proportion of the business in these lines con- 
trolled by the International Harvester Company was nearly as 
great as the figure shown above for grain binders. 

Always pertinent is an examination of the ability of a trust, 
once formed, to retain its monopolistic position. Sufficient data 
are available to indicate with substantial accuracy the relative 
position of the International Company and the independents 
in the leading lines from 1902 to 191 1 and in 1918. The 
situation with respect to grain binders is shown in the table 

PRODUCTION OF Grain Binders in the Unttbd States, 1902-1911, 1918 

IntemcUional Harvester Co. 

Independents * 


Per cent 


Per cent 












180,401 * 










65 3 














* Report on the International Harvester Company, p. 180; and Report of 
the Federal Trade Commission on the Causes of High Prices of Farm Imple- 
ments, p. 679. 

* Output of the five companies entering the trust in 1902. 

*When the number produced by the independents was not known, the 
number sold was used instead. As a rule it made little difference which figure 
was used. 


From an examination of this table it appears that the Inter- 
national Harvester Company increased its proportion of the 
output of binders from 90.9 per cent in 1902 to 94.2 per cent in 
1903. This may be ascribed chiefly to the acquisition in 1903 of 
the important Osborne concern. Beginning in 1903 there was 
a decline, until in 1906 only 87.0 per cent of the output was pro- 
duced by the trust. After a slight increase in 1907 and 1908 the 
percentage declined again in 1909 to 87, where it remained in 

1910 and 191 1. The International Harvester Company, there- 
fore, in spite of the acquisition of several competitors, did not 
quite hold its own. Moreover, it is significant that while the 
total output of the independents increased between 1902 and 
191 1, notwithstanding the acquisition of several of their number 
by the Harvester Company, the total output of the trust ac- 
tually declined. Nevertheless the International Company still 
had in 191 1 a monopoly position in the manufacture of binders. 
Between 191 1 and 1918, however, the company lost heavily. 
Whereas in 191 1 it had produced 87 per cent of the total output, 
by 1918 its percentage had fallen to 65.3 per cent.^ This marked 
decline was partly due to the growth of some of its competitors, 
and partly due to the falling off in 19 18 of the export trade, in 
which the International Harvester Company was the leading 

The situation with resp)ect to mowers is shown in the table 
on page 245.^ 

As with binders, the International Harvester Company, 
through the acquisition of the Osborne concern, increased its 
proportion of the country*s output of mowers in the year after its 
organization. In 1902 the company produced 82.5 per cent of the 
mowers produced in this country; in 1903, 87.7 per cent. Yet 
its proportion since 1903 has shown a declining tendency. In 

191 1 it amounted to 76.6 per cent, and in 1918 to only 59.5 per 

* Report of the Federal Trade Commission on the Causes of High Prices 
of Farm Implements, p. 679. 

* Report on the International Harvester Company, p. 182; and Report of 
the Federal Trade Conmiission on the Causes of High Prices of Fann Imple- 
ments, p. 679. 



Production of Mowers in the United States, 1902 

-1911, 1918 

Iniemational Harvester Co. 

Independents * 


Per cent 


Per cent 










191 1 


324,180 « 



























23 -4 

cent. Whereas the output of mowers by the independents 
increased nearly 7,000 between 1902 and 1918, that of the trust 
declined by over 210,000. 

The data for rakes are not so complete. The Bureau esti- 
mated, however, that the five companies merged into the Inter- 
national Harvester Company produced in 1902, 67.8 per cent 
of the rakes; that in 1903, with the acquisition of the Osborne 
Company, the proportion probably exceeded 80 per cent; and 
that in 191 1 it had fallen to about 72 per cent.' The per- 
centage in 1918 was placed by the Federal Trade Commission 

at 57.5-* 

The dominant position of the International Harvester Com- 
p>any is well brought out by the following table, which shows the 
number of harvesting machines of all kinds sold in 191 1 by every 

' When the number produced by the independents was not known, the 
number sokl was used. 

* Output of the five companies entering the trust in 1902. 

'Report on the International Harvester Company, p. 183. According 
to the Brief for the International Harvester Company (no. 56), p. io8a, the 
International Company in 1905 sold 77.8 per cent of the rakes disposed of in 
this country, and in 191 1, 67.8 per cent. 

* Report on the Causes of High Prices of Farm Implements, p. 679. 


concern contributing as much as i per cent to the country's total 
sales, and the percentage sold by each.* 

Sales of Harvesting Machines in the United States in 19 ii, with 


International Harvester Co 

Acme Harvesting Machine Co 

Johnston Harvester Co 

Deere and Co 

Emerson-Brantingham Co 

W. A. Wood Mowing and Reaping Machine Co. . . . 

Adriance, Piatt and Co 

Thomas Mfg. Co 









3 47 








1. 19 

Per cent 

The International Harvester Company in 191 1 sold over 
three-fourths of the total number of harvesting machines sold in 
this country. Its percentage would be even larger were it cal- 
culated upon a basis of value rather than of number, since the 
company's control, generally speakmg, was greatest for the 
higher priced machines, such as grain binders, com binders, and 
headers. The next largest harvester concern was the Acme 
Company, with a capital of $3,500,000 (the capital of the Inter- 
national Company was $70,000,000).^ The Acme Company 
sold less than 5 per cent of the harvesting machines sold in this 
country, and unlike the International it did not make the entire 
line of harvesting machines. The only independent concern 
that did make an entire line was the Johnston Harvester Com- 
pany, capitalized at less than $2,000,000, and producing less than 
4 per cent of the total output of harvesting machines. In com 
binders the International Company in 191 1 had only three 
competitors; in reapers, only four; and in grain binders, eight, 
four of whom were quite unimportant. In mowers and rakes 
alone was there any considerable number of competitors; but 
none of them had as much as 8 per cent of the trade in either 
of these lines.' Again, hardly any of the independents competed 

* Brief for the United States (no. 56), p. 26. 

•Ibid., p. no. 

'Ibid., p. III. 


with the International Company throughout the whole United 
States; their sales were confined mainly to the East, especially 
New York state and the New England states. 

Since the above date (1911) a number of strong concerns have 
entered the field. Among them is Deere and Company, with a 
capital in 1911 of $58,007,100. This e^q)ansio^ of the Deere 
Company was made on the principle of carrying a full line (no 
company, not even the International, had a really complete line 
of farm machinery),^ and the strong selling organization already 
possessed by the Deere Company and by other independents 
made it easier for them to secure a good share of the harvesting 
machine business than it would have been for a newly organized 

So far as the lines other than harvesting machines are con- 
cerned, the Bureau of Corporations estimated that the Interna- 
tional Harvester Company produced in 1909 the following per- 
centages of the various products.^ 

Com shredders 55 . 7 

Binder twine 55 . i (62 . 7 in 1911) 

Manure ^readers 55.1 (1911) 

Spring tooth harrows 49. i 

Disk harrows 25.9 (43.1 in 1911) 

Hay stacl^ers 24. 2 

Hay loaders 20.8 

Farm wagons 13.0 (about 15.0 in 1911) 

Wheeled cultivators 11. 5 

Through the acquisition of other companies and through the 
expansion of its own plants, the International greatly increased 
its output in the new lines. Naturally its monopolistic position 
in the harvesting machine trade facilitated this development of 
its business. 

How is the ability of the International Harvester Company to 

* The acquisition of plow plants by the International Harvester Company 
in 1919 has given it practically a full line, since plows were practically the 
only type of farm implement it was not then producing. 

•Report on the International Harvester Company, pp. 184-188. The 
estimate is based on the Census reports and the production of the Interna- 
tional Company as given in its annual reports. 



maintain its semi-monopolistic position to be explained? The 
chief sources of its power seem to have been two: fii^^t^ its p ro- 
ductive e fficiency; J^y^ nH ^ jtt pnmfnninn nf ^rgf firifi^'*^ re- 

rirat. The International Harvester Company, generally 
speaking, produced it^ machines at a lower cost than its com- 
petitors. This was especially true of grain binders, the most 
important harvesting machine. Thus, the average factory cost 
of producing binders at the domestic plants of the International 
Harvester Company during the two years 1910 and 191 1 com- 
bined was $56.32, the figures for the different plants being 
$54.11, $56.30, $64.94 and $73.78.^ (These factory costs do not 
include general and miscellaneous expenses, nor a very large 
item of selling expense.) The average factory cost for the four 
leading independents was $70.83. (To some extent these dif- 
ferences in cost resulted from diflFerences in the machines, though 
the machines were substantially similar in type.) For only two 
of the four independents was the factory cost distinctly below 
the highest factory cost of the International Harvester Com- 
pany, and for one independent the factory cost was distinctly 
higher than the cost in any of the four factories of the Inter- 
national Company. In each instance the output of the inde- 
pendent plants was much smaller than the output of any of the 
International Company's plants, except one. The relative 
smallness of the independent plants largely explains their higher 
factory costs. If we prorate over the total factory costs the 
general and miscellaneous expenses not included in the foregoing 
figures, the showing of the independent plants is even less 
favorable. While this may be the result in part of different 
methods of keeping costs, it is unquestionably due in consider- 
able measure to the comparatively small output of the inde- 

' Report on the Intematioiial Harvester Company, p. 260. The basb of 
the discussion of costs that follows is the above report, pp. 260-265. It 
should be noted that the raw materials which are produced by the Inter- 
national Company for its own use are charged up to costs on the basis of the 
prevailing market prices, and, therefore, its costs arc comparable with those 
of the independent producers. 


pendent plants. If we add the general and miscellaneous ex- 
penses to the factory costs, the average cost of binders for the 
International Harvester Company during 1910-1911 becomes 
$58.57, and for the independents $76.18. This difference is con- 
siderable, yet, it should be noted, it is no larger than the differ- 
ence between the costs at the several International plants. 

The foregoing differences in costs must not be understood to 
indicate the relative profit per machine, since the selling expense 
of the International Company was much higher per machine 
than that of the independents. Apparently this high selling 
expense was the result of its elaborate selling organization, 
which strengthened its hold on the trade and aided it in obtain- 
ing a large volume of business. Yet it is still true, in spite of its ' 
high selling expense, that the margin of profit for the Interna- 
tional Company was larger than it was for the independents. 

The International Harvester Company thus found one of its 
chief sources of power in its lower cost of producing binders, — 
the most important machine in the harvester trade. 

Much the same was true of mowers and rakes. The factory 
cost of mowers at the four plants of the International Company 
ranged during the period 1910-1911 from $18.78 to $27.35, ^^^ 
averaged $20.09. ^^^ ^^ independents the average was $24.98. 
For some of the independent plants, therefore, the cost was less 
than for some of the International Company plants; in fact, at 
aU the independent plants the factory cost was lower than at the 
plant of the International Company with the highest cost, and 
at aU but two of the independent plants the factory cost was ^jr 
lower than at the plant of the International Company with the 7 
second highest cost. While some of the independent plants 
produced more mowers than did the smallest International 
plant, yet most of them produced less. None of the independ- 
ents, however, had an output which could compare with that of 
the McCormick and the Deering plants, and as a result their 
costs were higher in comparison. As with binders the selling 
expense was less fc( the independent concerns. 

The average cost of rakes for the International Company was 
$10.84, and for the independents $12.47. The factory cost for 


the most efficient independent plants was thus much nearer the 
factory cost for the most efficient of the International Company 
plants than for either binders or mowers, and therefore the 
advantage of the trust was less in this branch than in the other 
two leading branches. 

It is clear from what has been said that, generally speaking, the 
International Harvester Company could produce harvesting 
machines more cheaply than its competitors.^ It seems evident, 
also, that this* advantage was mainly due to the large volume of 
its output. In the harvester business the process of manufac- 
ture, which requires the use of a considerable variety of raw 
materials, is highly elaborate, and large factories with expensive 
equipment are necessary. Low production costs can be attained 
only through a minute division of labor; and this involves pro- 
duction on a large scale. It was in the largest plants of the Inter- 
national Company, namely, the McCormick and the Deering 
plants, that the lowest costs were attained; and in some of the 
smaller plants the costs were even higher than for the independ- 
ents. The advantage of the trust in production rested, therefore, 
to a very large degree on the fact that it included the two largest 
plants.^ The important query, therefore, is not whether the 
trust could produce more cheaply than its smaller rivals (this 
can hardly be disputed), but whether the McCormick and Deer- 
ing plants, the largest in the country in 1902 (and because of the 
volume of their output possessing the lowest costs) became more 
efficient by virtue of the fact that they entered the trust. To 
this question no definite answer can be given. One fact, how- 
ever, is clear. The organization of the International Harvester 
Company did not reduce the costs of the McCormick and Deer- 

^ For a comparison of the cost of producing harvesting machines in 1916 
and in 19 18 at the McCormick works of the International Company and at 
five independent plants, see Report of the Federal Trade Comniission on the 
Causes of High Prices of Farm Implements, p. 669. 

*The output of binders at the McCormick plant during each year from 
1903 to 191 1 exceeded by at least eight times the cmtput of binders at any 
independent plant during the corresponding year. Ae output of mowers at 
the McCormick plant was six times greater than the output of any independ- 


ing plants through an increase in the volume of their output 
(perhaps the most important factor leading to low costs), be- 
cause the volume of production at these plants was as great prior 
to the merger as at any subsequent date.^ 

Second. Another element of strength was the possession by 
the International Harvester Company of large financial re- \ 
sources. This enabled it to maintain an elaborate selling organi- \ 
zation, — an organization to handle not only harvesting machines, 
but a great variety of agricultural implements, such as wagons, 
spreaders, etc., with a consequent saving in the cost of market- 
ing. The possession of large financial resources also made it 
possible for it to grant long terms of credit to purchasers. The l 
practice of extending credit for considerable periods was origi- 
nally employed in the harvester business because of the inability 
of the farmers to pay cash (binders, for example, are quite ex- 
pensive); and though farmers are now in a better position than 
formerly to pay cash, the system is still used as a means of getting 
trade, particularly in foreign countries. The International 
Company, acquiring a strong financial position by the act of 
combination, not only retained this practice in the harvesting 
machine business, but more conspicuously than any other con- 
cern extended it to the newer lines, which are generally less 
expensive, and which were formerly sold on a cash basis. The 
company was aided in carrying out this policy by the backing of 
J- P. Morgan and Company, its fiscal agents, and by the loans of 
Mr. John D. Rockefeller, a father-in-law of one of the McCor- 

The charge has been made that the International Harvester 
Company, especially in the years immediately following its 
organization, resorted to imfair competitive methods. This 
charge may be briefly considered. 

(i) The International Company up to 1905 paraded as inde- 
pendent certain concerns that in reality were not independent. 
The most important of these concerns was the firm of D. M. 
Osborne and Company. This practice, however, came to an end 
in 1905. 

' Report on the International Harvester Company, pp. 257-258. 


(2) The International Company in its commission agency 
1/ contracts up to 1905 inserted a clause requiring the dealer to 

handle the company's harvesting machines exclusively.^ With 
trust proceedings threatening in several states, this clause was 
removed in 1905, and was not restored.^ In fairness to the 
company it should be said that the exclusive contract clause was 
customary among harvester companies prior to the establish- 
ment of the merger, and that some concerns in the implement 
trade continued to retain it in their agency contracts even after 
it was abandoned by the International Company.' It mi^t 
seem as if there were no objection to the requirement that a 
dealer handle the goods of only one company, since such a provi- 
sion has the obvious advantage of enlisting the interest of the 
dealer in the selling of the manufacturer's article. Yet it should 
be clear that this requirement may result in monopoly. If there 
are only a few dealers in a given town, and each one of these is 
given some brand of the trust's harvesters, the requirement of 
exclusive dealing may shut out the machines of the independent 
manufacturers, particularly if the machines of the trust are in 
such insistent demand that a dealer must handle them if he is to 
do a profitable business. 

(3) The International Company so allotted its brands of har- 
^ vesting machines as to enlist the services of an undue proportion 

of dealers.^ Some 95 per cent of the farm machinery in this 
country was purchased from the local retail dealer; and at most 
towns there were only two or three dealers.^ The International 
Company by giving only one brand of its machines to a particu- 
lar dealer was able — so the Bureau of Corporations put it — to 
absorb the services of all or at least a large proportion of the 
dealers in any one locality. The opinion was common in the 
trade that the purpose of the company in giving a different line 

' 81 Kansas Reports 611. According to Brief for the International Har 
vester Company (no. 56), p. 96, this clause was not enforced. 

* Report on the International Harvester Company, p. 304. 

* Brief for the International Harvester Company (no. 757), p. 80. 

* Report on the International Harvester Company, p. 290. 
» Ibid., pp. 291, 293. 


to each dealer was largely to prevent these dealers from pushing J 
the sales of the goods of competmg manufacturers. The repre- 
sentatives of the company denied that they had any such pur- 
pose; and urged that even if this was the effect, as claimed by 
the Bureau of Corporations, it was not an imfair method of 
competition, if not accompanied by a requirement of exclusive 

(4) Complaint was also made that in some cases the Inter- ' 
national Company resorted to local price cutting. While there 
may have been instances of resort to this device, yet in general 
it was the practice of the company to charge dealers uniform 
prices for similar machines.^ 

(5) The International Company through its industrial rail- 
ways obtained excessive divisions of the through rate on the 
transportation of its goods to market. This was brought to 
li^t through an investigation of the Interstate Commerce Com- 
mission in 1904.^ The Illinois Northern Railway and the Chi- 
cago, West Pullman and Southern Railway (both controlled by 
the International Company) operated terminal railroads in the 
city of Chicago. For the switching services performed by them 
a reasonable compensation would have been $3.50 and $3.00 per 
car, respectively. In fact, however, these tap lines received a 
division of the through rate amounting in some cases to as much 
as $12 per car. The Commission held that the excess of the 
amoimt received by the industrial railways of the International 
Company over a reasonable payment was in its essence a rebate 
to the company. This use of the industrial railway to evade 
the prohibitions of the law forbidding rebates now stands defi- 
nitely prohibited, and there is no evidence, so far as the author 
is aware, that the International Company continued to employ 
the device.* Certainly there would be no advantage to the 

1 Brief for the International Harvester Company (no. 56), pp. 101-102. 

' Report on the International Harvester Company, p. 325. 

» See 10 I. C. C. Reports 385-404. 

^According to President Roosevelt (in a letter dated August 22, 1907) 
the International Harvester Company promised in 1904 to rectify the prac- 
tices disclosed by the investigation of the Interstate Commerce Commission, 


company in its employment after 1913, since in that year the 
industrial railways were transferred to a separate corporation, — 
the International Harvester Corporation. 

The International Company also made use of price lists, and 
its salesmen were guilty of misrepresenting the machines of 
competitors.^ Yet on the whole the conduct of the company was 
remarkably free from unfairness in its relations with comf)eti- 
tors.^ Even its competitors testified to this effect. Most, if not 
all, of its objectionable practices were abandoned some time 
before the government instituted its dissolution suit; or were 
the result of competition between agents, and were not coun- 
tenanced by the higher officials of the company. 

The company, furthermore, was not bolstered up by the 
control of the limited supply of a natural resource (its control 
over the raw material used to make binder twine, — ^manilla and 
sisal fiber, — ^may possibly be an exception to this general state- 
ment); its monopoly position was not due to patent rights (the 
basic patents had expired prior to its organization); and such 
tariff protection as it has had has been unimportant.^ If, there- 
fore, there is such a thing as a "good trust" the International 
Harvester Company can doubtless qualify as well as any other. 
The suit brought by the government against this company thus 
squarely presented to the courts the question as to whether a 
trust is illegal or not, irrespective of the methods employed by*it.* 

The estabhshment by the International Company of a monc^ 
oly position and the substantial maintenance of that position 
for a number of years have been shown. What has been the 
policy of the monopoly with respect to prices? 

and it stood ready in 1907 to prove that it had abided by its promise. Cong. 
Record, April 25, 191 2, p. 5318. 

^ Report on the International Harvester Company, i>p. 310, 324. 

'There can be no doubt, said Judge Sanborn of the Circuit Court, "that 
the consistent and persbtent purpose, policy, rule of action, and practice of 
the defendants has been and is to avoid and prevent all acts and methods 
imfair, unjust, or oppressive toward their competitors." 214 Fed. Rep. 1008. 

* Since the passage of the tariff act of 1913 agricultural implements can be 
imported free of duty. 

* Cf . p. 436. 


The significant comparison, of course, is between prices prior 
to 1902 and prices after 1902. The only evidence on this point 
that has come to our attention is a table prepared by the Inter- 
national Harvester Company, showing the price of six foot 
binders and five foot mowers from 1892 to 1912.^ From this 
table it appears that the price of binders advanced in 1900 and 
1 901 (the two years prior to the organization of the trust), but 
fell in 1902 (the year the trust was organized) to its former figure, 
where it remained through 1907. Substantially the same was 
true of the price of mowers. The government in its Brief con- 
ceded that the circular or asking prices of harvesting machines 
had not materially advanced since 1902, but contended that the 
prices actually received were not the same.^ Upon the organiza- 
tion of the trust — so it alleged — the constant shading of prices 
was stopped, thus leading to an actual increase in the return 
realized by the International Harvester Company. The defend- 
ants counter attacked by pointing out that the government had 
not called a single witness to testify that prices had been ad- 
vanced to the injury of the farmer, thus leading to the presump- 
tion that no such injury had in fact resulted.' 

The course of prices from 1903 to 191 1 for certain kinds of 
farm machinery is shown by the table on page 256. 

The table shows the average prices realized by the Inter- 
national Company for its chief classes of machines. Slight 
changes in prices from year to year *do not, it should be noted, 
necessarily indicate any actual change in the prices charged. 
This is because these prices are generally averages for all types 
and sizes of a given machine, and a variation in the proportion 
of machines of the various sizes sold would naturally cause a 
change in the average price received, even though in the meantime 
there had been no change in the price of any particular machine. 
Yet making full allowance for such factors, it is still true that 
during the period from 1903 to 191 1 there was a general advance 

' See Appendix to Brief for the International Harvester Company (no. 
624), p. 286. 
' Brief for the United States (no. 56), p. 171. 
* Brief for the International Harvester Company (no. 757), p. 127. 







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in the price of harvesting machines. For example, in 1908 the 
price of 5, 6, and 7 foot binders was advanced by $7.50; the price 
of 8 foot binders by $15.00 (1907 and 1908); and the price of 
mowers by $2.50. Yet to conclude from this statement that the 
trust made for higher prices would not be fair. Prices of mate- 
rial and of labor were undoubtedly rising, and an increase in prices 
might therefore have taken place, trust or no trust. Again, the 
quality of the machines might have improved in the meantime.^ 
As bearing on the responsibility of the trust for the advance, we 
may note that the prices of disk harrows and two-horse wagons, 
in the manufacture of which competition was quite active, were 
also advanced in 1908. Again, in 191 2 the International Com- 
fwiny made a general reduction in the price of its harvesting 
machines. Grain binders were reduced $5.00, and proportionate 
reductions were made for other harvesting machines. This 
reduction was attributed by the company to a decline in the 
cost of production, yet it is perhaps significant that it was made 
after the government had begun preparations to file a bill against 
the company. 

Some idea of the reasonableness of the prices charged may be 
had by an analysis of the profits realized. The profits of the In- 
ternational Company may be determined by two methods: first, 
by a comparison of its net earnings with its net assets; second, by 
a comparison of its net earnings with its capital stock and sur- 
plus. The table below shows the results by the first method.^ 

Ratio of Net Earnings to Net Assets, Exclusive of Good Will, as 

Computed by the Bureau, 1903-1911 

Year Ratio Year Ratio 

1903 • p.73« 1908 8.73 

1904 5-34 1909 ^3-43 

1905 7.01 1910 12.77 

1906 6.74 1911 II. 51 

1907 731 

* The International Company claims that this was the fact. Brief for the 
International Harvester Company (no. 56), p. 52. 

' Report on the International Harvester Company, p. 238. 

» This is for a period of fifteen months. For an explanation of the low 
earnings in 1903, see ibid., pp. 207-210. 


The average rate of earnings for the nme years was 8.47 per 
cent; and if we leave out the exceptional year 1903 the average 
was over 9.00 per cent. A striking fact is the gradual increase 
in the prosperity of the company. The rate of profit averaged 
4.36 per cent during the first three years; 7.59 per cent during the 
next three years; and 12.57 per cent during the three years 
following the price advance of 1908. Hence while the profits of 
the company were quite reasonable on the average, during the 
later years they were distinctly, higher. It should be remem- 
bered, however, that in these figures no allowance is made 
for good will. The company made no entry for good will on its 
books, and the Bureau found it difiicult to compute its amount. 
Were good will to be included in the net assets, the rate of profit 
would be much lower. 

The second method is to show the profits on the capital stock 
and surplus. 

Ratio of Net Earnings as Reported by the International Harvester 
Company to Capital Stock and Surplus, 1903-1911 * 

Year Ratio Year Ratio 

1903 4- 70* 1908 6.73 

1904 4.64 1909 10.89 

1905 6.08 1910 10.91 

1906 5-85 1911 9.9s 

1907 6.31 

The earnings on the capital stock and surplus averaged 7.34 
per cent for the nine years and 10.58 per cent for the last three 
years. These figures are somewhat below the ratio of earnings 
to net assets, since the Bureau found the company to be slightly 
overcapitalized at its organization.^ Yet had the good will been 

^ Appendix to Brief for the International Harvester Company (no. 624), 
pp. 163-164. 

'Computed on the capital stock ($120,000,000). 

* Through the reinvestment of surplus earnings the original deficiency in 
physical assets had been entirely overcome by the end of 1908, and up to the 
stock dividend of 19 10, at any rate, the company was undercapitalized 
rather than overcapitalized. Report on the International Harvester Com- 
pany, p. 25. 


included in making the earlier calculation, the result might have 
been diflferent. 

It is apparent that by either method of calculation the earnings 
of the International Company were moderate.^ And even more 
moderate were the dividends actually disbursed to stockholders. 
The rate of dividend was 3 per cent in 1903, and 4 per cent in 
1904, 1905, and 1906. In the latter year the stock was divided 
into $60,000,000 preferred and $60,000,000 common. On the 
preferred a rate of 7 per cent was begun in June, 1907, and this 
rate was regularly paid thereafter. No dividend was paid on the 
common stock during 1907-1909. In 1910 a 33 1/3 per cent 
common stock dividend was declared, and a quarterly dividend 
of I f)er cent inaugurated. In 191 1 the rate was increased to 
I 1/4 per cent quarterly. 

It is worth noting, in closing this subject, that the rate of profit 
obtained by the International Company was much greater for 
its highly monopolized lines — that is, harvesting machines — 
than for the newer lines, such as wagons and spreaders. ^ In other 
words, the influence of monopoly on prices and profits is some- 
what obscured by the fact that the figures given are for the total 
profits of the International Company rather than for its profits 
in those branches that were monopolized. 

^ Some tables showing the earnings of the International Company from 
1913-1918 may be found in the Report of the Federal Trade Commission on 
the Causes of High Prices of Farm Implements, pp. 90-95. 

' Report on the International Harvester Company, p. 240. 



Having surveyed the trust movement and having studied in 
detail a number of representative trusts, we may now turn to an 
examination of the underlying causes of the trust movement. 
An understanding of the reasons for forming trusts will enable 
the reader more readily to comprehend the popular attitude 
toward them as evidenced in legislative enactments and judicial 
proceedings; and will greatly assist him in determining what the 
(>ubUc poUcy with respiect to them should be. 

The primary explanation of the trust movement, notably that 
characterizing the period from 1898 to 1903, would appear to be 
the desire of the manufacturersito restrict or eliminate competi- 
tion, and thus to establish monopoly prices. Whether this 
competition that it was desired to eliminate was " ruinous" in its 
nature is a question we have analyzed elsewhere at considerable 
length, the conclusion being that competition can not properly 
be regarded as ruinous, except possibly in a quite limited range 
of industries.^^A secondary influence was the hope of achiev- 
ing the economies of the trust form of organization, — a topic 
that will receive consideration in chapter XIX. _^Third, though 
of less importance, was the lure of large profits for the trust 
promoters, men who conceived the idea of a trust in a given 
industry, or, if they did not conceive it, at least carried it through 
to a successful consummation. Th^re were other incentives, to 
be sure, such as the ambition of certain individuals to become 
Napoleons of industry, but undoubtedly these were the three 
principal motives. First, then, as to the trust and prices. 

The evidence as to the effect of trusts on prices has been pre- 
sented for a number of trusts; and may be briefly summarized at 
this point. In making this summary and throughout the sub- 

* Quarterly Journal of Economics, 34, pp. 473-519 (1920). 



sequent discussion the endeavor will be made of course to avoid 
a dogmatic presentation; the difficulty of speakihgwith positive- 
ness on this perplexing matter is fully realized. Jxis easy to show / 
that on innumerable occasions the organization of a trust or the , 
tightening of monopoly control has been accompanied by high^ 
prices, yet one can not always be certain that prices would not I 
also have advanced under competitive conditidns. Despite the 
diflSculties, however, it is believed that both history and general 
reasoning establish the tendency of the trusts to increase prices. 
First, as to the teachings of experience. 

One of the earUest and most powerful trusts was the Standard 
Oil Company. The prices charged for oil by this company 
formed the subject of an unusually elaborate study by the Bu- 
reau of Corporations, as the result of which the Bureau was able 
to speak with confidence and authority concerning the eflFect of 
the oil trust on prices. The Standard Oil Company, so the 
Bureau noted, had repeatedly claimed that it had reduced the 
price of oil; that it had been a benefit to the consumer; and that 
only a great combination like the Standard could have furnished 
oil at the prices that had prevailed. '' Each one of these claims," 
said the Bureau, ''is disproved by this report." With regard to 
the period to 1897, though the price statistics for these early 
years were by no means complete, yet making all the necessary 
allowances " they demonstrate the falsity of the historic claim of 
the Standard Oil Company that by reason of its extraordinary 
eflSciency it has brought prices to a point lower than would have 
been reached had business remained under normal competitive 
conditions and in the hands of a number of comparatively 
smaller concerns." ^ For the period following 1897 and down to 
1905 the statistics were very full, having been collected by the , 
Bureau directly from thousands of retail dealers throughout the 
country. A careful analysis of these figures establishes, said the 
Bureau^ that " the Standard had consistently used its power to 
raise the price of oil during the last ten years, not only absolutely 
but also relatively to the cost of crude oil." ^ The Bureau as- 

* Rqx>rt on the Petroleum Industry, part II, p. XXXm. 
» IbkL, p. XXX. 


serted that the Standard had used its monopolistic power to 
" oppress the public through highly extortionate prices," and the 
truth of this assertion is abundantly demonstrated by the 
voluminous evidence presented in its report on oil prices. 

The effect of trusts on prices is shown in illuminating fashion 
by the experience of the sugar trust. The story is found on 
pages 116-119. Briefly summarized, it appears that the mai:gin 
between the price of raw sugar and of refined sugar was high 
during the early eighties, and declined rapidly after 1882 and 
until 1887 (the year in which the sugar " trust'* was formed). 
The decline in the margin between 1882 and 1887 reflected the 
keen competition that prevailed, — a competition so severe that 
only those refiners who realized the economies of large-scale 
production were able to operate at a profit. Many refiners, 
particularly those who failed to envisage the inevitable trend 
toward larger production units, were indeed obliged to withdraw 
permanently from the business. In October, 1887, the " trust 
agreement" became effective; and the margin rose from three- 
quarters of a cent per pound (in 1887) to one and one-quarter 
\tents (in 1888), an increase of approximately 65 per cent. No 
doubt the margin was abnormally low prior to the formation of 
the "trust"; and therefore it is difficult to say how much of the 
increase is fairly attributable to it. The high margin of 1888, 
however, speedily attracted new competition; and as a result 
the margin fell in 1890 to an even lower figure than during the 
eighties. In 1892 the trust, through the acquisition of a number 
of competitors, secured nearly a complete monopoly of the sugar 
refining industry; and the margin was considerably advanced 
once more. As before, this induced new competition, as the 
result of which the margin fell below the cost of refining. Upon 
the acquisition of several competitors in 1900, prices and margins 
again went up; but this led to the construction of competing 
refineries, and in 1904 the margin again declined. Taking there- 
fore the first eighteen years of the life of the trust — the margin 
after 1905 indicates the existence of competitive conditions — it 
appears that sugar prices were low when competition was pres- 
ent, and were advanced when competition was absent or 


brought under control. The conclusion seems to be justified 
that the trust made for high prices, and that it did Uttle, if 
anything, to steady them.* 

Trusts in the steel industry seem also to have made for higher ^ 
prices of steel products.^ The most important of the trusts 
organized in the various branches of the iron and steel industry 
during 1898 to 1900 were the American Tin Plate Company, the 
American Steel and Wire Company, and the National Tube 
Company — the Carnegie Company, the Federal Steel Company, 
and the National Steel Company were mammoth combinations, 
the first two doing a larger business in the aggregate than any of 
the steel trusts, yet they did not individually monopolize any 
important branch of the trade. The American Tin Plate Com- 
pany was organized in December, 1898, for the purpose, accord- 
ing to its president, " of getting together to do away with foolish- 
ness in making prices." ^ For several years prior to its formation 
the price of tin plates had shown a declining tendency, the 
average monthly price at New York per hundred pounds being 
$3.50 in January, 1896 (the maximum for 1896-1898), and $2.89 
in December, 1898.* From that month on it steadily increased 
until by September of the following year it had reached a 
monthly average of $4.83, or nearly $2.00 per hundred pounds 
higher than when the trust was formed. The price remained at 
this figure without deviation of more than a cent until August, 
1900. By October of 1900 the price had fallen to $4.19, where 
it remained unchanged for two years.** 

The American Steel and Wire Company of New Jersey was 
organized in January, 1899. During the preceding year the price 
of wire nails at Pittsburg had averaged $1.34 per hundred 
pound keg, being $1.29 in December, 1898.* The price advanced 

1 On this latter point see Jenks and Clark, The Trust Problem, pp. 138-139. 
s See pp. 196-197, 203, 225-230. 
' Industrial Commission, I, p. 885. 

* Brief for the United States (no. 481), vol. II, p. 1047. 

* Sec Jenks, Bulletin of the Department of Labor, vol. V, no. 29, p. 735, for 
a table showing that the increase in the price of tin plate during 1899 was 
much greater than the increase in the cost of raw materials. 

* Brief for the United States (no. 481), vol. II, p. 1045. 





Steadily throughout 1899, the average for the year being $2.32 
per keg, or nearly 75 per cent higher.* By January, 1900, the 
price had reached $3.20 per keg, but it did not long remain at 
this height. The outbreak of competition during the middle of 
1900 brought the price down to $2.20 per keg, yet this was much 
above the price that had prevailed prior to the formation of the 
trust, and more than the trust was able to get in the years that 
followed. The price of plain wire at Pittsburg followed the same 
general movement. From a figure of $1.13 per hundred pounds 
in December, 1898, it rose to $3.05 in January, 1900, and then 
declined to $2.15 in May. During the same period the price of 
barbed wire advanced from $1.75 per hundred poimds to $3.80 
per hundred pounds.^ Mr. Gates, the chairman of the company, 
testified in November, 1899, that the rapid advance in the price 
of barbed wire was no doubt due to the fact that the company 
had a complete monopoly.^ 

The National Tube Company was organized in June, 1899. 
The year previous to its formation the price of tubes was $30.00 
per gross ton; the year of its formation, $67.00 per ton; and early 
in the year after its formation, as high as $89.00 per ton.* 

But it is not at all clear to what degree the trusts were respon- 
sible for these increases in prices. These early steel trusts were 
formed during a period of prosperity, which would have led to 
higher prices even in the entire absence of artificial inflation. 
Costs, moreover, were advancing, since the prices of raw mate- 
rials likewise responded to the heavy demand. The^ces of the 
finished products, however, increased more rapidly than costs, 
and as a result profits were unusually large. Whether prices and 
thus profits were higher than they would have been had it not 
been for the trusts is a question that can not be answered with 
certainty. However, such would appear to have been the case; 

* The advance in prices was greater than the increase in raw material 
costs. See Jenks, Bulletin of the Department of Labor, voL V, no. 29, 
p. 744. 

' Brief for the United States (no. 481), vol. IT, p. 161. 
' Industrial Commission, I, p. 1009. 

* See p. 196. 


and certainly the trust organizers in enormously overcapitaliz- 
ing the properties anticipated such an outcome. 

As is indicated by the table on page 203, the formation of the 
United States Steel Corporation ^as not followed by as con- 
siderable an advance in the prices of steel products as was the 
case on the formation of the earlier steel trusts. The prices in 
May, 1901 (the first month after the organization of the Corpo- 
ration) were higher than the prices in October, 1900 (the last 
month in which competition was active) for every product 
shown except tin plates, yet the increase was not so noteworthy 
as in the case of the earlier trusts. No doubt a partial explana- 
tion is the fact that the combination and trust movement in this 
industry during 1898 to 1900 had already established prices on a 
high level. It would appear also that the managers of the Cor- 
poration, profiting by the experience of the earlier trusts, had 
chosen to charge more moderate prices in order to discourage 
potential competitors. The real influence of the organization of 
the Steel Corporation would be best shown, of course, by a 
comparison of the prices that prevailed in 1901 with those that 
would have prevailed in 1901 (and subsequent years) had the 
battle of giants been allowed to proceed; but this comparison 
obviously cannot be made. 

The extent of the control exercised over prices by the Steel 
Corporation is well shown by the movement (or lack of move- 
ment) of steel rail prices. This matter is discussed on page 229. 
The Corporation's practice of maintaining the ^aine^prices over 
comparatively long periods was employed also in the case of 
billets, plates, structural steel, tin plates, wire, wire nails, bars, 
and black sheets, though by no means to the same degree.^ 
The policy was possible, however, only because of cooperation 
with its competitors as arranged through the so-called Gary 
dinners and other devices. That these prices were highly prof- 
itable is proven by the enormous profits obtained by the Cor- 
poration, enabling it within fifteen years more or less to squeeze 
out the water from its stock, which at the beginning had little 
behind it but the hope of monopoly gains. 

* Sec Brief for the United States (no. 481), vol. II, pp. 1038-1047. 


The tobacco trust was fully investigated by the Bureau of 
Corporations, and a volume deaUng particularly with prices, 
costs, and profits was issued. Nevertheless for several reasons it 
is difficult to speak positively concerning the effect of the trust 
on prices. Thus, the American Tobacco Company when or- 
ganized in 1890 secured control of the cigarette business, yet 
detailed data covering prices of cigarettes are not available for 
the years prior to 1893. After 1893 the net price of cigarettes 
less taxes steadily declined until 1899, and then rapidly advanced 
abnost uniformly down to 1910.^ However, these price move- 
ments were roughly in harmony with costs; the profit per thou- 
sand remained fairly steady throughout the whole period. That 
the prices were highly remunerative is shown by the analysis of 
profits on pages 161 seq. 

The proportion of the little cigar business done by the trust 
is not known for the years prior to 1898. In that year it pro- 
duced less than 50 per cent of the little cigar output of the 
country. Its share of the business steadily increased until by 
1910 it amounted to over 90 per cent of the total. Likewise the 
profit per thousand steadily increased, being 41 cents per thou- 
sand in 1898, and $1.03 per thousand in 1910.^ Net prices (less 
tax) were no higher in 1910 than in 1898, but costs were very 
much lower. The trust thus kept for itself all the benefits of 
declining costs. 

For plug tobacco the statistics are more complete.' In 1894 
the net price of plug tobacco less taxes amounted to 29.1 cents 
per pound. At that time no one company dominated the 
industry. During 1894 the American Tobacco Company 
instituted a campaign for the domination of the plug business, 
and prices were severely cut, falling to 12.2 cents per pound in 
1897. Early in 1898 a combination was agreed upon, and the 
price for the year rose to 16.7 cents per poimd. During the 
following year the Liggett and Myers Tobacco Company was 

» See p. 155. 

• Report of the Commissioner of Corporations on the Tobacco Industry, 
part III, p. 182. 

* Sec pp. 157-159- 


acquired, and the price averaged 21.0 cents, and in 1900, 22.8 
cents. In the years that followed control was made eflFective, 
and prices and profits increased. By 1908 (the high-w^ter mark 
for prices down to 1910) the price had reached 30.3 cents, and 
the profit 8.0 cents, as compared with a loss during each year 
from 1895 to 1898. The appropriation by the trust of the 
benefits of the remission of the Spanish-American war taxes also 
testifies to the power and workings of trusts. 

Similar results appear upon an examination of the prices and 
profits obtained in the smoking tobacco and snuff branches. A 
comparison of the latter business (the most highly monopolized 
branch of the tobacco industry) with the cigar business (the 
least monopolized branch) is unusually instructive in its bearing 
on the comparative results of monopoly and competition. On 
this point the reader is referred to page 159. 

The data are not available to determine what influence has 
been exerted on prices by the harvester and shoe machinery 
trusts, the two remaining trusts of those described in some detail. 
So far as the harvester trust is concerned,^ it does not appear that 
it has increased prices to an appreciable degree. The Depart- 
ment of Justice made the allegation that while the circular prices 
of harvesting machines were not increased upon the organization 
of the trust in 1902, the prices actually received did increase 
through the abandonment of price cutting. However, the 
government introduced no evidence to support this allegation, 
and the company imequivocally denied it. The Bureau of 
Corporations in its report on the International Harvester Com- 
pany devoted comparatively little space to the subject of prices, 
but concluded that the company had taken advantage of its 
monopolistic position in harvesters to increase both prices and 
margins, while reducing prices in those outside lines in which it 
had to meet keen competition.^ It is easy to show, of course, 
that there was a general advance in the price of harvesters during 
1903 to 191 1, yet this was a period of rising prices and costs, and 
hence it would not be fair in the absence of complete information 

> Sec pp. 254-257. 

* Report on the International Harvester Company, p. 255. 


to attribute the advance to the trust, particulariy smce the price 
of some agricultural implements that were subject to competition 
likewise advanced. The fact is that the International Harvester 
Company during the period from 1903 to 191 1 earned a compara- 
tively moderate return on a capitalization singularly free from 
water. In part, of course, this low rate of return resulted from 
the fact that its profits on the competitive lines were combined 
with its profits on the monopolized lines, thus tending to obscure 
the influence of monopoly on prices and profits. 

The whisky trust is not one of the concerns described in detail 
in the preceding chapters. However, the prices charged by it 
have been carefully investigated by Professor Jenks; * and we 
may sunmiarize his conclusions. Professor Jenks points out that 
immediately after the organization of the whisky " trust" in 1887 
the prices of spirits were reduced rather than advanced. How- 
ever, this reduction in prices was designed to force the remaining 
competitors into the "trust"; and when this purpose had been 
accomplished prices were increased, and the profits became very 
large. The profits were so good in fact that new distilleries were 
constructed, and accordingly in 1889 prices had to be cut to crush 
the new competition. In 1890 the " trust " reorganized under the 
corporate form; and during the middle of 1891 acquired its 
principal rival. Prices and margins thereupon increased. Early 
in 1893 the price and the margin were at a very high point, but 
by the middle of 1894, because of competition, speculation, and 
poor management on the part of the trust officials, the price 
had fallen very low, and the margin had entirely disappeared. 
In January, 1895, the trust went into the hands of a receiver. 

We need not follow the whisky trust through its checkered 
career. It will suffice to state Professor Jenks* concludon that 
the trust was able to control the price of spirits rather effectively 
for comparatively short periods after each reorganization; and 
that at times it used this control to increase prices and margins, 
and at other times it reduced prices to injure its competitors. On 

> See The Trust Problem (191 7), pp. 141-149; Bulletin of the D^>artment 
of Labor, vol. V, pp. 726-731; Political Sdence Quarteriy, 4, pp. 309-314, 
and 5, pp. 495-497. 


the whole, however, either because of the persistence of competi- 
tion or because of the policy of the management, prices, down 
to 1898 at least, were less stable than prior to the formation of 
the trust.* In the later years of its life, notably after 1900, the 
trust adopted the policy of charging more moderate prices in 
the hope of keeping competition within boimds.^ Like many 
other trusts it had foimd that a grasping policy defeated its own 
ends by artificiaUy stimulating production, and thus making 
impossible the maintenance of prices at a profitable level. 

That the trust organizers anticipated that the establishment 
of monopoly conditions would permit the charging of prices 
above a competitive level is indicated by the huge structure of 
overcapitalization that they erected.' JGenerally speaking, the 
capitalization of the trusts was twice as large as the value under 
competitive conditions of the properties and businesses that they 
acquired. I Usually the preferred stock represented the value of I 
the plants prior to their union in the trust, and the common stock I 
the hope of monopoly profits. Returns on the common stock of 
the trust, unbacked as it was by property, might be reaped were 
one of two results achieved : first, a reduction of costs consequent 
upon the realization of the economies of the trust form of organi- 
zation; or second, the elevation of prices to a monopolistic level. 
No doubt the trust organizers intended to take full advantage of 
both of these opportunities in the endeavor to earn satisfactory 
dividends on the common stock as well as on the preferred stock, 
yet if the conclusions of chapter XIX are soimd, their best pros- 
pect of success was through the raising of prices. 

That the common stock of most of the trusts was ''water," / / ' 
that is, had no actual property behind it, is nowhere seriously 
questioned. The following well authenticated facts bearing on 

' Bulletin of the Department of Labor, vol. V, p. 731. 

* Industrial Conunissiony I, p. 814. 

* The term overcapitalizatbn as here employed refers to a capitalization 
in excess of both the investment and the reproduction cost. A successful 
trust mi^t be able to earn normal returns on ^watered" stock, yet this 
indicates not so much the reasonableness of the capitalization as the enjoy- 
ment of monopoly profits. 


some leading trusts would appear to ''make assurance doubly 

The value of the property acquired by the Steel Corporation 
in 1901 was the subject of a painstaking study by the Bureau of 
Corporations.^ In this investigation three different bases were 
used, — the investment of the constituent companies at the time 
of their formation, the average market value of their securities 
from the date of their organization to the close of 1900, and the 
value of the properties as evidenced by a physical valuation. 
The conclusion of the Bureau was that the common stock of the 
Corporation, amounting to 36 per cent of its total capitalization, 
was water; and that from one-fifth to two-fifths of the preferred 
stock, this stock also amounting in the aggregate to 36 per cent of 
the total capitalization, was water, the amount of the over- 
capitalization depending on the basis of valuation employed. 
By either the investment or the physical valuation basis, slightly 
over 50 per cent of the total capitalization had no assets behind 
it; and by the market value of the securities basis, reflecting, as 
it did, the monopoly profits of the constituent companies, the 
percentage was 43. This tremendous overcapitalization, proven 
in the case of the Steel Corporation, was characteristic also of 
the earlier steel trusts, as is established in the report of the 
Bureau of Corporations.^ This was admitted also by Judge 
W. H. Moore, a well-known trust promoter, when in testimony 
before the Industrial Conmiission he said: "everybody knows 
what they are getting when they get common stock; they know 
they are not getting anything that represents assets." * 

The various tobacco trusts were also heavily overcapitalized. 
The cigarette trust (the original American Tobacco Company) 
was capitalized at $25,000,000. The Bureau of Corporations 

* See pp. 208-210. 

•See Report on the Steel Industry, part I, pp. 127-133 (American Steel 
and Wre Company); pp. 133-136 (American Tin Plate Company); pp. 138- 
139 (American Steel Hoop Company); pp. 139-141 (American Sheet Steel 
Company); pp. 141 -144 (National Tube Company); and pp. 144-145 (Shelby 
Steel Tube Company). See also Brief for the United States (no. 481), vol. I, 
pp. 22, 26, 29, 31, ss. 

' Industrial Commission, I, p. 963. 


found that the tangible assets of the constituent companies 
amounted to $5,370462 (including $1,825,354 in notes of the 
organizers)/ and the good will to $8,954,892; or an overcapitali- 
zation exceeding $10,000,000.^ The Continental Tobacco 
Company (the plug tobacco trust), after acquiring the Liggett 
and Myers Tobacco Company in 1899, had a capitalization of 
$97,690,700, one-half preferred stock and one-half common. The 
company entered $26,831,123 of this on its books as tangible 
assets, and the balance ($70,859,577) as intangible assets. The 
Bureau declared that the value of the intangible assets, meas- 
ured on a cash basis, was not over $16,664,867; and the over- 
capitalization therefore amounted to $54,194,710.^ Over 55 per 
cent of the company's securities might therefore be regarded as 
water. The American Snuff Company (the snuff trust) was also 
heavily overcapitalized. At its organization in 1900 it was 
capitalized at $23,001,700, of which $12,000,000 was preferred 
stock and $11,001,700 common. The Bureau found that the 
tangible assets of the constituent concerns were worth $4,312,- 
728, and the good will not over $7,689,000, or a total of not to 
exceed $12,001,728. All of the common stock, therefore, was 

Despite their excessive capitalization these trusts all paid 
large dividends on their stock, water and all. Their ability to do 
so testified, as said before, not to the reasonableness of the capi- 
talization, but to the possession of monopoly earnings. In con- 
trast, the American Cigar Company, which hoped to monopolize 
the dgar industry, earned only a moderate return on a capital- 
ization free from water, yet this was because it did not succeed 
in effecting a monopoly of its branch of the business, and 
it was therefore unable to raise prices above a competitive 

Among the other trusts that were overcapitalized, some of 

' Against these notes an entry was immediately made on the books of the 
company to surplus, so that the capital and surplus amounted to $26,825,354. 
*Sce p. 123. 

' Report on the Tobacco Industry, part II, pp. 12, 99. 
^ Ibid., pp. 28-29. 


them quite heavily, were the following: the American Sugar 
Refining Company,' the American Can Company,^ the Dis- 
tilling and Cattle Feeding Company and its successors,* the 
National Starch Manufacturing Company (the starch trust),* 
the Glucose Sugar Refining Company (the glucose trust), ^ the 
Com Products Company (the starch and glucose trust),* the 
Com Products Refining Company (the successor to the Com 
Products Company),' the International Paper Company,® the 
American Bicycle Company ,• the American Malting Company,*® 
the Asphalt Company of America,** the Mount Vemon-Wood- 
berry Cotton Duck Company, *^ the National Cordage Company," 
the National Salt Company, ** the National Shear Company, *^ the 
New England Cotton Yam Company,** the Rubber Goods 
Manufacturing Company,*' the United States Leather Com- 
pany,** and the United States Rubber Company.** 

Some tmsts, on the other hand, have been capitalized on a 
moderate basis. Among them the most conspicuous illustrations 

* Industrial Commission, I, p. 13 (Review of Evidence). See also pp. 120- 

* 230 Fed. Rep. 870-871, 877. 

* Industrial Commission, I, p. 14 (Review of Evidence). 

* Ibid., XIII, p. 673. 

* Brief for the United States in United States v. Com Products Refining 
Company (no. £-10-122), p. 485; and Dewing, Corporate Promotions and 
Reorganizations, pp. 79, 532. 

* Dewing, op. cit., pp. 89, 93-95. 
'Ibid., pp. 106, 108-109. 

'Industrial Commission, I, pp. 409-410, 415-416, 419-420, 432-433, 441. 

* Dewing, op. dt., pp. 254, 532. 
'* Ibid.,pp. 278-279, 296, 532. 

" Ibid.,pp. 432-433» 532. 
»*Ibid.,pp. 342-343, 532. 

*' Industrial Conunission, XIII, p. 130; Dewing, op. dt., pp. 123, 532. 
" Industrial Commission, XIII, pp. 249-250; Dewing, op. dt., pp. 207- 
208, 532. 
>^ Industrial Commission, I, p. 1044. 
"Dewing, op. dt., pp. 313-316, 325, 532. 
"Industrial Commissbn, XIII, pp. 37, 47. 
"Dewing, op. dt., pp. 20, 23, 532. 
" Industrial Commission, XIII, p. 48. 


are the Standard Oil Company/ the International Harvester 
Company,^ the Pittsburg Plate Glass Company,' and the meat- 
packing companies.^ 

The ability of the trusts to charge excessive prices and to 
capitalize the increased ^xning power thus created must be y^ 
ascribed in many cases to'lhe protection afforded by the tariff. 
Had it not been for the prohibitions, partial or complete, imposed 
by the tariff, foreign competition would have operated to prevent 
prices in this country from being raised above the foreign cost 
plus transportation expenses. And if prices could not be much 
advanced as the result of the elimination of domestic competi- 
tion, there would have been no justification, even on the earning 
power basis, for the issuance of a mass of watered securities, 
unless indeed the trust should prove to be much more efficient 
than the producing units that it displaced.^ /Ahe protective 
tanff thus promoted the trust movement by offering to the 
manufacturers prospects of large profits — ^profits large enough to 
induce them to overcome their inherent repugnance to relin- 
quishing their independence and the control of their own busi- 
ness — and by offering to the investing public a chance to share in 
the speculative gains.* // 

However, the influence of the tariff must not be exaggerated. 

Trusts were formed in industries not protected by tariff duties as 

well as in industries enjoying such artificial support; and they 

were formed in industries in which such protection was purely 

ncxninal as well as in industries in which the trusts required 

' If we compare the capitalization of the Standard with the actual invest- 
ment (exclusive of the reinvestment of surplus earnings) it was overcapital- 
ized in 1906; if we compare it with the cost of reproducing the property on 
that date it was distinctly undercapitalized. See Brief for the United States 
(no. 725), vol. II, pp. 4-5- 

• See p. 236. 

' Industrial Commission, XIII, pp. 227, 241. 

^Report of the Commissioner of Corporations on the Beef Industry, 

PP- 39-40. 

• This matter is discussed in ch. 19. 

• The tariflf also furthered the trust movement by intensifying competition 
m the protected industries. On this point see Bullock, Quarterly Journal of 
Economics, 15, pp. 208-209. 


assistance were they to compete successfully with foreign 
manufacturers./Clearly the tariflF can not be held responsible 
for the formation of trusts in those industries-in which the eflS- 
dency of American manufacturers was so pronounced that 
domestic prices remained lower than foreign even after the 
elimination of competition in this country, fitht truth is that 
the causes of the growth of monopoly are numerous and complex, 
and the most that can be said with respect to the tariff is that 
in many instances it was a contributing factor of considerable 

So much for conclusions grounded on experience. Let us next 
consider on the basis of general reasoning what is the probable 
effect of monopoly on prices. 

According to the theory of monopoly price, a monopolized 
article will be sold at the price that yields the maximum net 
profits.^ If a high price be charged, the profit per unit will be 
large, but the volume flf sales will be small, unless t he demand be 
inelastic. Jf , on the other hand, a low price be chargedJJifLprofit 
per unit will be small, but the volume of sales will bejaige, pro- 
viding the demand_is elastic. Under these circumstances the 
monopolist (trust) may be expected in the absence of restraining 
factors — of which more later — to hit upon, through a process of 
trial and error, that price which brings in the greatest net revenue. 
What that price will be will depend, as stated before, on the 
conditions of demand. In general, a high price wUlJbcjnoi^ 
profitable if the demand is inelastic, that is, if it persists despite 
high prices; and a low price will be more profitable if the demand 
is elastic, that is, if it increases as the price falls, and decreases as 
the price rises. What will be the most profitable price will 
depend also on the conditions of cost. If the cost of producticm 
rises as the voliune of output increases, the tendency will be to 
pursue a high price policy, since increased business occasions a 
greater expense per unit. This will be particidarly true, if at the 
same time the demand is inelastic. If, however, the cost of pro- 

' For a more extended discussion of the theory of monopoly price, see 
Taussig, Principles of Economics (191 1), I, ch. 15; Ely, Outlines of Eco- 
nomics (1916), pp. 200-207; and Ely, Monopolies and Trusts, ch. 3. 



duction falls as the volume of output increases, the tendency 
will be to pursue a low price policy, since enlarged business ^ 
causes a reduced ex p e n se per unit. If the demand be elastic, the \ 
monopolist will be almost certain to charge comparatively low 
prices. If, finally, the cost be neither increasing nor decreasing, 
but constant, the calculations of the monopolist will be more 
simple; he will adjust his output with reference solely to the 
demand, choosing that price that promises the maximum net 

Such being the principles underlying the determination of 
monopoly price, how does a monopoly price compare with a \^ 
ccHnpetitive price? There is ji:eneral agreement among leading 
economists that a monopoly price is likely to be higher than a 
competitive p rice.^ The explanation of this tendency lies in the 
control exercised by the monopoly over the supply. Under 
competitive conditions the price of an article tends to hover 
about the cost of production (including in cost a normal profit). 
If the price rises above the cost, the supply increases and the 
price falls again, provided there has been no change meanwhile in 
the conditions of demand; and if the price falls below the cost, 
the supply decreases and the price rises again. Under monopoly 
conditions, however, the price of an article does not tend to hover . 
about the cost of production, but at a point somewhat above; / 
for the monopolist can limit the supply, and by this means pre-/ 
vent prices from faUing to a level determined by cost. To be 
sure, the monopoly in restricting the supply and advancing the 
price is confronted with the possibility of a considerable decline 
m its sales; and it may find it advantageous to pursue a moder- 
ate policy. But thf, competitive producer charging a high price 
will not only s^er a reduction in his sales through the decline in 
the demand, but also through a diversidi^ of his busine^ to his 

^ Taussig, Principles of Economics (1911;, I, p. 206; Ely, Monopolies and 
Trusts (1906), p. 119; Fisher, Elementary Principles of Economics (191 2), 
p. 330; Carver, Principles of Political Economy (1919), p. 352; Bullock, 
Introduction to the Study of Economics (1908), p. 337; Fetter, The Principles 
of Economics (1910), p. 330; Seligman, Principles of Economics (1910), 
p. 258; Seager, Introduction to Economics (1905), p. 498. 


competitors. To a monopoly, assuming it to be effective and to 
have competition well under control, there is one check on high 
prices, whereas to a competitive producer there are two. It is of 
course evident that an individual competitive producer can 
restrict his own supply, and thus raise prices somewhat, yet he 
can not ordinarily by such means enhance his profits. The 
benefits of the high price go to his fellow producers who continue 
production in undiminished volume; and are temporary at best, 
since the high prices stimulate the output. To the consuming 
public this is precisely the merit of the competitive system, that 
under it a particular producer can not augment his profits 
by restricting the output. A monopoly, on the other hand, 
may achieve its success, not by increasing, but by limiting 

The monopoly price, it should be observed, may be no higher, 
and may even be lower, than the competitive price, if the mo- 
nopoly is more efficient than alternative forms of business organi- 
zation. The monopoly under these conditions would still charge 
the price that was the most profitable to it, but this price might 
be below the cost of production (including a normal profit) to 
smaller concerns. Whether this is to be anticipated so far as 
industrial monopolies (trusts) are concerned will receive con- 
sideration later.* 

If these are the principles upon which monopolies proceed, 
how does it happen that it is difficult to show in convincing 
fashion the whole effect of trusts on prices? The explanation is 
that there are many considerations that have made it seem 
advisable for the trusts to exercise restraint in their price policy, 
with the result that they have not advanced prices as much as 
might be anticipated did they feel entirely secure in their mo- 
nopolistic position. 

1 (i) First of all there is the potential competition of new 
concerns. If the trust is too greedy for profits and raises prices 
unreasonably, there are attracted to the industry a host of 
new companies anxious to participate in the unusual* returns. 
During the early life of the trust movement the individual trusts 

* See ch. 19. 


frequently tried to do away with this competition by the resort 
to unfoir competitive tactics, notably local price cutting, railroad 
discriminations, and exclusive dealing requirements; and en- 
deavored through threats of employing such practices against 
all would-be competitors to prevent new concerns from ever 
getting started. Such methods resulted in the destruction of 
many enterprises, and may be said to have been reasonably 
successful in many instances. Yet they were not always used, 
and even when used they were by no means always effective. 
In many industries the trusts found themselves overcome by the 
new competition, and their control of the trade speedily dwindled 
away. The lesson was salutary, and the trusts that survived 
pursued a more farsighted policy. They commonly came to see 
the inadvisability of charging prices so high that new concerns 
were tempted to rush headlong into the business hoping to get 
their capital back in a few years, for such a policy led to serious 
overproduction and to an inevitable decline in prices. They 
charged instead more moderate prices, albeit somewhat above a 
competitive figure. It thus appears that potential (and actual) 
competition has operated on occasion to prevent the trusts from 
following their natural course. Yet potential competition is not 
a satisfactory or adequate regulator of trust profits, because the 
strength of many trusts is based on the possession of some special 
advantage in competition, such as the ownership of patents or a 
limited natural resource. When this is the case, there are effec- 
tive obstacles, perhaps insuperable ones, in the way of competi- 
tion, and the trust need exercise little restraint, unless there be 
danger of hostile legislation of one kind or another. Again, in 
some industries, though competition is not artificially restrained, 
it may be backward because of the large capital needed to embark 
in the undertaking, or because of the length of time required to 
construct the plant and to establish the business. In such 
industries the possibility of reduced prices on the emergence of 
competition may prevent potential competition from becoming 
actual competition, and may enable the trust to charge prices 
that are considerably above the cost of production, and thus to 
secure a monopoly profit. 



\ \ / (2) The possibility of substituting for the monopolized 
/article another one that is being sold at a more reasonable price is 
a factor that may induce trusts to refrain from charging exorbi- 
tant prices. If the price of kerosene be abnormally hi^, people 
will use gas and electricity; and no doubt the competition oi 
these fuels has operated to keep down the price of kerosene, and 
thus outwardly to lend support to the argument that the oil 
trust has reduced its price. If the price of sugar be excessive, 
erstwhile consumers will adopt such substitutes as glucose. 
In industry, manufacturers may employ as fuel soft coal, hard 
coal (the steam sizes), gas, oil, and the like; and they may even 
bum no fuel, but run their machinery with electricity generated 
by water power hundreds of miles away. In homes, wood is also 
a possible substitute. Steel, lumber, concrete, stone, and brick 
all compete with one another to some extent in building. Rubber 
shoes (or soles) may be substituted for leather shoes; and enam- 
eled ware and tin may be used in place of aluminum cooking 
utensils. Even the tin can trust must bear in mind that an 
excessive price for tin cans may hamper the fruit preserving 
industry in its competition with the fruit drying industry. How- 
ever, the possibility of substitution is not always present, or, if 
present, may exercise comparatively little influence. What, it 
may be asked, are effective substitutes for watches, cameras, 
cigarettes, salt, grain binders, and steel rails? Moreover, when 
the competition of substitutes is effective, there is an incentive to 
secure control over the allied industry, which explains the en- 
trance of Standard Oil capitalists into the gas industry, and the 
attempted domination of the substitutes for meat by the leading 
meat-packers. The conclusion would appear to be justified that 
while collateral competition may impose some limitations on 
monopoly power, it by no means insures that the monopolized 
article will be sold at a reasonable price, and it is thus a safe- 
guard of limited effectiveness. 

(3) A particular trust may be restrained by the fact that its 
sales are made in large part to another trust, or possibly to an 
important combination. For example, a copper trust, if obliged 
to sell to a brass trust, might meet with determined resistance to 




exorbitant prices; the latter by withholding purchases mij^t well 
break the market. A tin can trust in such fashion might secure 
relief on its purchases of tin plate. However, it rarely happens 
that one trust is the principal market for another. The shoe 
machinery trust and the cash register trust buy large quantities 
of steel, yet their purchases constitute such a small percentage of 
the total that such action as they individually might take to 
reduce the price charged for steel by a steel trust would be of 
little consequence. So it would be with the purchase of cotton 
yam by the thread trust, and of steel pipes and tubes by the 
oil trust. It is precisely because of their limited control over 
the affairs of other trusts that some of them make for themselves 
the articles which they would otherwise have to secure from 
their fellow trusts. This explains in large measure why the 
oil trust, the tobacco trust, and many others make their own 
tin cans instead of buying them from the American Can Com- 
pany. We must conclude that the balance of power among 
trusts, though it protects the consumer in part, is not an effective 
bar against excessive prices of trust made goods. 

(4) The disinclination to arouse public opinion also plays its 
part, and no doubt a considerable one. The people, if sufficiently 
antagonized, will repeal favoring legislation or pass restrictive 
laws. Many trusts have been protected against foreign competi- 
tion by protective duties; but the trust that uses these duties as 
an excuse for unreasonable prices fzjces the danger of a removal 
of its protection. Other trusts are founded on patent monopolies 
permitted by the government; but the patent laws can be re- 
vised, if it seems desirable. But not only may favoring legisla- 
tion be repealed, but regulative laws may be passed. At the 
present time (1919) biUs to regulate the meat industry are re- 
ceiving the serious consideration of Congress; and the suggestion 
at one time or another has been soberly made that the oil and the 
steel industries (and others) are essentially public service corpo- 
rations, and should be regulated as such. Indeed, a considerable 
body of public opinion favors the regulation of the prices of all 
monopolized articles. Another considerable group advocates 
public ownership of natural resources, a step that would be of 


particular concern to some ten important trusts. In view of 
1 these contingencies it is likely that the trust managers, with 
I their fingers on the public pulse and with an eye to the continued 
I enjoyment of their strategic position, will refrain from pressing 
I their advantage to the fullest; and their prices will not in the 
futiu*e, as they have not in the past, conform rigidly to the 
, ^ principles of monopoly price as above laid down. 

^ (5) A trust, it has been said, may be influenced by a sense of 
{equity and reasonableness; it may desire to have the good will of 
the dealers and the public, and thus may not take advantage of 
their necessities. The steel trust, for example, fixed the price of 
steel rails at $28 per ton, and charged no more than this during 
periods of prosperity, when market conditions would have 
enabled it to get more. In this particular instance the price was 
fixed at a very high level to begin with, hence this is hardly an 
illustration of equitable dealing. Yet it is conceivable that a 
trust, even though created in an anti-social spirit, might ccane 
under the leadership of managers of a different sort, — ^managers 
desirous of charging only a fair price. Conceivable though it be, it 
is unlikely, since even under the competitive r6gime it is regarded 
as proper to charge what the public is willing to pay; and why 
should a monopoly take any less? The fact would appear to be 
that in so far as trusts (or their managers) adopt a spirit of 
reasonableness it is because such a course is the one best calcu- 
lated to secure for them the good will of the trade and of the 
consuming public, and thus to prolong their enjoyment of 
moderate monopoly profits. 

(6) The trust because of inert management may not try to 
secure the maximum net profit. Unwilling to meet the attacks of 
competitors and of politicians, it may hesitate to exploit the 
public, and may rest satisfied with a moderate profit, perhaps 
little, if any, above a competitive level. Under these circimi- 
stances, the control of the business might soon be sought by more 
aggressive and forceful interests, alive to their opportunities, and 
able to make handsome returns even after paying a good price 
for the property. Yet the owners of the business, notwithstand- 
ing the inertness of the management, might refuse to sell, hence 


there can be no certainty that each trust will be managed along 
the lines offering the maximum profit. 

(7) A trust may fail to charge the price, that produces the 
greatest net revenue through sheer inability to ascertain what 
that price is. Among the unknown factors in the problem are 
the amount of the demand at various prices and the extent to 
which the cost of production will increase or decUne as the out- 
put varies. The matter is compUcated because the demand 
schedule, even if it could be worked out for any given date, 
changes from time to time. The demand for any particular 
article depends on the state of business, on the mood of the con- 
suming pubUc, and on the distribution of purchasing power 
among the community. If business is good, the demand will 
normaUy be great, and a high price may yield the maximum net 
profit; and conversely, when a period of depression sets in. If 
the public is extravagantly minded, as at present (1919), a 
proportionately large outlay will be made for consumer's goods, 
and their monopoly price could well be high; and conversely for 
those articles that are in demand when thrift is in vogue. Again, 
if there occurs a marked change in the distribution of the com- 
munity's purchasing power, so that the bondholders and the 
salaried classes have less and the working people more, the 
trusts that produce articles desired by those of increased pur- 
chasing power could raise their prices, whereas those trusts that 
produced articles desired by individuals of reduced purchasing 
power might be compeUed to reduce their prices. There may be 
other matters that complicate the problem; but enough has been 
said to show that at best all that a trust can hope to do is to 
approximate the most profitable price. Though the price that it 
charges will doubtless be somewhat, perhaps considerably, 
above the competitive price, it will not be fixed, we may premise, 
as the result of a mathematical formula at the exact point that 
would actually prove 'to be the most remunerative. 

The foregoing considerations make it evident that the price 
policy of the trusts has been less grasping than might have been 
expected of an agency formed largely for the express purpose of 
suppressing competition. They also demonstrate that though 


there are certain forces at work to safeguard the public interest, 
i these forces are not adequate of themselves, since they do not 
prevent the trusts from charging prices higher than the public 
would pay under competitive conditions, assmning that industry 
is as economicaUy conducted under the latter state as under the 
\ first. As to legalizing trusts in the hope of satisfactorily regu- 
lating them and their prices, it will be shown in chapter XX 
^that price regulation is a problem of the first magnitude and 
me whose successful solution is problematical. 




In this chapter it is proposed to indicate by a study of in- 
dividual trust promotions the importance of promoters' profits 
as a cause contributing to the formation of trusts. 

The function and work of the promoter have been well 
described elsewhere/ and need not be dwelt upon here in any 
detail. Briefly, in a typical trust promotion the promoter secured 
options on the plants that were to be combined; arranged, 
usually through an underwriting syndicate, for the raising of the 
necessary funds; organized a corporation to acquire the plants; 
and provided for the transfer of the plants (or securities) to the 

In effecting a trust promotion the promoter had first to 
obtain options on the properties (or the securities), otherwise 
the owners would in all likelihood have advanced their purchase 
price as it became evident that the trust was to be formed. The 
promoter, to be sure, might have bought all the properties for 
cash, but this would have involved a great deal of risk, and 
would, moreover, have been diflScult to finance. In fact, it was 
rarely done. Second, he had to secure financial backing, since 
the trust required working capital (it did not ordinarily acquire 
the working capital of the constituent companies), and since 
some owners would almost certainly demand cash for their 
plants, refusing to accept securities, the value of which was more 
or less problematical.^ Generally speaking, however, the amount 

^See Meade, Trust Finance, chs. 4-6; Haney, Business Organization 
and Combination, ch. 18; and Lough, Corporation Fiiumce, chs. 12-14. 

* Thb cash the promoter usually secured through the sale of stock to an 
underwriting syndicate. Because of the risk that the stock could not be dis- 
posed of at a profit, the syndicate was wont to insist on a commission in the 
form of bonus stock. 



of cash required to buy out the manufacturers was comparatively 
small. Ordinarily the promoter offered them at least one share 
of preferred stock and one of common stock in lieu of $100 in 
cash; ^ and tempted by the profits that were anticipated for the 
trust, the manufacturers commonly agreed to take the stock. 
Had they not been willing to take stock very few trusts would 
have been formed. The promoters would have been unable to 
supply the large amount of cash that would have been required,^ 
and the public would have hesitated to buy securities that were 
unacceptable to the manufacturers, who were acquainted with 
the industry and its prospects. Third, the promoter had to 
organize a new company to acquire the plants or the stocks of 
the underlying companies, unless, indeed, one of the existing 
companies was used for this purpose. In any event the capital- 
ization of the new (or reorganized) company was likely to be 
determined by the promoter, with the advice of the financiers. 
Finally, he had to arrange for the transfer of the properties or 
securities of the separate companies to the newly-organized 
corporation in exchange for its securities or for cash, or both. 
Sometimes the corporation gave to the promoter all or part of 
its stock in return for an agreement upon the part of the pro- 
moter to deliver to it the plants or control of the companies 
owning the plants. In that case the size of the promoter's 
profit depended on how favorable a bargain he was able to 
drive with the separate manufacturers. At other times the 
corporation offered to exchange its securities for those of the 
constituent companies at a definite ratio, the promoter taking 
his profit perhaps in the form of a stock commission. In either 
event there would probably be issues of stock to the financiers 
or bankers who agreed to supply the requisite funds. 

It is clear, therefore, that the organization of a trust usually 
involved large issues of stock to a great variety of individuals. 
These included: (i) the promoters who purchased or secured 

*The preferred stock usually represented the value of the plants; the 
conunon stock the anticipation of nsonopoly gains. 

' The financiers would have balked, of course, at putting up cash to finance 
a proposition that the manufacturers mistrusted. 


options on the properties, and who devised the financial plan; 
(2) the financiers who raised, or agreed to raise, the necessary 
funds; (3) the lawyers who incorporated the company, and 
attended to the legal aspects of the promotion; (4) the manu- 
facturers who were generally unwilling to sell unless they re- 
ceived stock much in excess of the value of their properties; 
and (5) the public, which was expected to buy the stock, and 
which at times had to be tempted by an offer of common stock 
as a bonus. It frequently happened that the promoter was also 
a financier, that is, was a member of the underwriting syndicate, 
and less frequently perhaps he was also a manufacturer. His 
profits, therefore, were often a composite. Because of the 
difficulty, if not impossibility, of determining in individual 
cases of trust promotion to what extent the profits of the pro- 
moter were a reward for true promotion services, to what extent 
'a reward for financial services, and to what extent for legal and 
miscellaneous services, we shall in general in this chapter use the 
term promoters' profits to indicate the profits made by the 
promoters, financiers, and lawyers, but not including those 
additional profits that were realized by these groups when they 
were also owners of stock in the companies that were combined. 
There can be no doubt that the promoter, when he was also a 
manufacturer, may have been animated fully as much by a 
desire to secure profits in the r61e of manufacturer as in the role 
of promoter, yet this motive was by no means always present, 
since many trusts were promoted by "outsiders." Under this 
use of the term promoters' profits, it will be observed, we are 
underestimating rather than exaggerating the importance of 
promoters' profits as an inducement toward the formation of 
trusts. However, it will still be true in many instances that 
the inducement remained sufficiently great to give a distinct 
fillip to the trust movement. 

The largest trust and the one in which promoters' profits 
figured most prominently is the United States Steel Corporation. 
This company represented a union under the holding company 
plan of a group of concerns, some of which were merely combi- 
nations and others of which were trusts. The capitalization of 


the Steel Corporation thus allowed for the remuneration of two 
sets of promoters, those that had organized the constituent 
companies of the Corporation, and those that organized the 
Corporation itself. The two cases will be described separately. 

Some idea of the profits secured by the promoters of the steel 
combinations and trusts of 1898 to 1900 may be gained by an 
examination of the table on page 287, showing the amount of 
stock representing promotion charges, the value of this stock 
based on average market quotations during 1899 to 1900, and 
the percentage that this stock was of the total issue.* It should 
be noted that the amount of stock left in the hands of the 
promoters was not all profit, since usually the promoters had to 
give a part of this stock (or cash) to meet certain expenses 
incurred in the promotion. In general, however, such expenses 
were small. 

Even a cursory examination of the table makes it clear that" 
the promoters' profits were enormous. The promoters of the 
eight concerns for which data were available retained as their 
reward for promotion services some $63,000,000 of stock, or 
over one-tenth of the total issued stock (if we excluded the 
Carnegie Company, in the organization of which there were no 
promoters* profits, the ratio would be more than one-eighth). 
The market value of this stock, based on the average quota- 
tions during 1899 to 1900, was over $28,000,000. Its value based 
on the highest quotations of the respective securities during 
this same period was $40,549,188, and based on the lowest 
quotations, was $19,829,959. While the promoters could not 
have unloaded all of their stock at the highest quotation, it is 
improbable that they would have sold at the mininum figure 
for the two year period. If we assume that the promoters 
disposed of all their stock prior to 1901, the pn^ts of promo- 
tion were at least $20,000,000; ^ if we assume that they did not 

^ Report of the Commissioner of Corporations on the Steel Industry, part 
I, pp. 126, 129, 133, 136, 138, 140, 144, 14s, 170, 176-179. Referred to here- 
after in this chapter as Report on the Steel Industry. 

-These are pure profits of promotion; they do not include such indirect 
profits as the promoters might have made through the sale of securities given 




Common stock 

Value based 

on average 

market price 

iSgQ-igcx) * 

Ratio of 
stock repre- 
charges to 
issued cap- 
ital stock 

Xatioiial Tube Co 







4,456,811 » 




$ 9,744,000 

II. 9 

American Steel and Wire Co. . 

American Tin Plate Co 

American Bridge Co 

National Steel Co 

American Steel Hoop Co 

Federal Steel Co 


American Sheet Steel Co 

Shelby Steel Tube Co 

Carneffie Co 




10. 1 * 

dispose of all of their stock — we know that they did not — their 
possible profits were much greater, since upon the organization 
of the Steel Corporation they were allowed to exchange their old 
stock for a greater amount of stock in the Corporation.' In any 
event the profits were suflSciently large to tempt daring pro- 
moters to take advantage of an opportunity to "get rich quick," 

to them in return for cash or in return for the securities that they held in the 
companies that were combined. 

^ In the case of companies not organized until late in 1899 or early in 1900 
quotations are from the date of organization to the close of 1900. 

' Includes $857,192 of preferred stock. 

* Amount unknown, but probably large. See Report on the Steel Industry, 
part I, pp. 140, 178. 

* Amount unknown, but apparently small. See ibid., pp. 144, 179. 
*See ibid., p. 179. 

* 13.5 per cent if we did not include the capital stock ($160,000,000) of 
the Carnegie Company. 

^ Except in the case of the American Steel Hoop Company and the Ameri- 
can Sheet Steel Company. 


whether or no the product of their daring subsequently demon- 
strated its fitness to survive in a business world that is harassed 
under normal conditions by the pressure of new capital seeking 

The promoters' profits realized in these early combinations 
and trusts in the steel industry, large as they were, were eclipsed 
by those obtained by the promoters of the United States Steel 
Corporation. The syndicate which undertook to secure a major- 
ity of the stock of the eight companies originally acquired by the 
Corporation incurred cash expenses of $28,000,000, of which 
amount $25,000,000 went to the Corporation for working capi- 
tal. In return for this outlay and its underwriting services the 
syndicate was given by the Corporation a total of 1,299,975 
shares of stock (half preferred and half common), having a 
par value of $129,997,500. On this stock the syndicate re- 
alized about $90,500,000.^ Deducting the cash expenditures 
($28,000,000), it is evident that the syndicate made a profit of 
$62,500,000. Of this amount one-fifth went to the firm of J. V. 
Morgan and Company, the syndicate managers, for their serv- 
ices; and the balance ($50,000,000) was distributed among the 
members of the underwriting syndicate, including the Morgan 
firm.^ It is hardly necessary to point out that the possibility of 
making such large profits constitutes, in itself, a distinct induce- 
ment to the formation of trusts. 

This huge compensation to the syndicate was, according to the 
Bureau of Corporations, greatly in excess of a reasonable pay- 
ment; and particularly so in view of the reserved right of the 
syndicate managers to abandon the transaction at their own 
discretion.^ The syndicate merely undertook to acquire the 
securities of various steel companies; it did not guarantee to do 
so. It should be noted, moreover, that while the syndicate 
subscribers stood liable to raise $200,000,000 upon request of 
the s)aidicate managers, it was generally understood that they 
would not be called upon for more than $25,000,000 in cash; 

* Report on the Steel Industry, part I, p. 244. 

• Ibid., pp. 244, 248. 
•Ibid.jpp. 245-246. 


and this, in fact, was aU that .they contributed, except some 
$3,000,000 for organization expenses. The Bureau of Corpora- 
tions, in fact, alleged that this ''large nominal obligation of the 
syndicate subscribers to the S3mdicate managers apparently 
was determined upon in part with a view to disarming 
subsequent criticism of the enormous compensation which it 

From the point of view of the public it is clear that it would 
be necessary to charge excessive prices for iron and steel prod- 
ucts, if dividends were to be paid on the inordinate amount of 
stock given to the promoters of the Corporation, not to mention 
dividends on that part of the stock of the Corporation given to 
the promoters of the constituent companies (or their successors) 
in retiun for the stock held by them. The matter is important, 
since some $150,000,000 of the stock of the Corporation, or 
nearly one-seventh of its total stock, was issued, directly or 
indirectly, to promoters and underwriters.* 

The American Tobacco Company (the cigarette trust) was 
organized in 1890 as a consolidation of five of the leading manu- 
facturers of cigarettes. Since the manufacturers were them- 
selves the organizers, there were no promoters' profits as we 
have employed the term. At that early date it was not common 
for trusts to be formed by "promoters"; and the number of 
manufacturers being so few, it was comparatively easy to arrive 
at an agreement. There was, however, a very marked over- 
capitalization in the organization of the trust. The capitaliza- 
tion of the company was $25,000,000, of which $15,000,000 was 
common stock and $10,000,000 preferred. TJie value of the 
assets acquired did not exceed $14,400,000.^ The capitalization 
thus exceeded the assets (including good will) by at least $10,- 
600,000. The establishment of a high degree of monopoly 
control, however, made it possible for the company to earn ap- 
proximately 20 per cent on its common stock, water and all. 
Enormous profits were thus realized by the promoters of this 

* Report on the Steel Industry, part T, pp. 245-246. 
» Sec Report on the Steel Industry, part I, p. 251. 
' Cf. p. 271. 


company, but the profits were realized as manufacturers rather 
than as professional promoters. 

The Continental Tobacco Company (the plug tobacco trust) 
was organized in 1898. This company was very heavily over- 
capitalized, but, as with the American Tobacco Company, 
nearly all of its securities went to the owners of the eleven plants 
that were combined. Inasmuch as five of these eleven plants 
belonged to the American Tobacco Company, and inasmuch as 
this concern had been conducting a severe competitive campaign 
to force its competitors into a combination, there was less occa- 
sion than usual for resort to a promoter, who should undertake 
the task of inducing the separate owners to combine their in- 

Though promoters* profits did not figure prominently in the 
organization of the plug tobacco trust, they were nevertheless 
present. The firm of Moore and Schley, well-known bankers 
and brokers, secured cash options on four important concerns, 
producing among them nearly one-quarter of the output that 
went into the trust in 1898.^ The purchase price stipulated in 
the option agreements was $8,477,000. The bankers (Moore 
and Schley) also raised $2,751,400 in cash, to enable the Conti- 
nental Company to take care of its promotion and other ex- 
penses.^ For these properties and the cash the Continental 
Company gave $25,025,000 in stock (one-half preferred and 
one-half common), and $365,500 in cash.* The bankers in turn 
transferred $19,522,200 of the stock and all of the cash to the 
owners of the four plants; and retained as their pay $5,502,800 
in stock, half preferred and half common. While the bankers 
doubtless incurred a few incidental expenses, it is substantially 
correct to say that their profits on the transaction were the 
realizable value of this stock minus' the cash ($2,751,400) that 

1 Report of the Commissioner of Corporations on the Tobacco Industry, 
part I, p. 99; part II, p. 107. 

* Report on the Tobacco Industry, part I, pp. 101-102. 

■ Ibid., part II, p. 107. The cash payment represented interest on the 
purchase price during the period that intervened between the signing of 
the option and the transfer of the plants to the Continental Company. 


they raised. The market value of this stock during the three 
years of the life of the company — a reorganization was eflFected 
in 1901 — ^based on the minimum and maximum quotations 
ranged between $2^76,260 and $5,370,732. On this basis, had 
they sold at the minimum quotations (which is quite unlikely) 
they would have sustained a loss of $275,140; had they sold at 
the maximum quotations (which is equally unlikely) their 
profits would have been $2,619,332.^ On the other hand, if 
they refrained from selling during 1899-1901 they would have 
been in a position to participate in the reorganization of 1901 
(when the American Tobacco Company and the Continental 
Tobacco Company were combined), in which event new oppor- 
timities for profit would have presented themselves. It is 
probable, therefore, that the bankers made a handsome profit; 
but it is certain that the possibility of realizing a profit for the 
promoters as such had Uttle to do with the organization of the 
plug tobacco trust. 

The syndicate of bankers and manufacturers that secured an 
option on the Liggett aCnd Myers Tobacco Company, the largest 
plug tobacco concern outside of the trust, also made a large 
profit through its sale to the Continental Tobacco Company; in 
fact, it acquired the Liggett concern largely for that purpose. Yet 
since this syndicate, though composed in large measure of finan- 
cial and banking interests, was the actual owner of the properties 
that it conveyed to the trust, its gains may not be regarded as 
true promoters* profits, but rather as profits received as an 
owner of property that was indispensable to the trust. 

In addition to the cigarette and plug tobacco trusts a number 
of other companies with monopolistic aspirations were formed in 
the tobacco industry. These include the American SnuflF Com- 
pany (1900); the American Cigar Company (1901); the Consoli- 
dated Tobacco Company (1901) ; and the new American Tobacco 
Company (1904). In not one of these combinations, however, 
does it appear that any stock went to promoters or bankers for 
prcHnotion services. The absence of promoters' profits in the 
organization of the first two of these combinations was probably 
1 N^^ting dividends and carrying chaiges in each case. 


due to the fact that the concerns that were combined were so few 
in number that the owners were able to come together and effect 
an agreement among themselves; and in the last two to the fact 
that these combinations represented largely a rearrangement of 
securities, no new concerns being immediately brought in. On 
the whole, therefore, it is correct to say that promoters' profits 
have had surprisingly little to do with the formation of trusts 
in the tobacco industry. 

The American Can Company (the tin can trust) was organized 
in 1901 with an issued capital stock of $82,466,600, half preferred 
and half conmaon. Of this stock $78,000,000^ equally divided 
between preferred and common stock, was given to the promot- 
ers in exchange for some ninety-five plants on which the promot- 
ers held options and for $7,000,000 in cash raised by them.^ The 
promoters paid for the plants about $23,500,000, either in cash 
or in securities practically the equivalent of cash.^ Thus, when 
the manufacturers took stock — ^most of them did, for otherwise 
the combination could not have been formed — they received one 
share of preferred and one share of conmion for each $100 of the 
purchase price. On the assiunption that all of the manufacturers 
took stock, the promoters gave some $47,000,000 in stock for 
the plants, and had $31,000,000 left.^ Of this amount about 
$14,000,000 might properly be regarded as payment for the 
$7,000,000 in cash turned over to the American Can Company 
as working capital. Their actual profits, therefore, were the 
realizable value of $17,000,000 in stock, half preferred and half 
conmion. How much the promoters actually realized there is 
no means of knowing, but the market value of this $17,000,000 
in stock during April to August, 1901, was seldom below eight 

* Petitioner's Summary of Evidence in United States v. American Can 
Company (no. 40), pp. 73"76. 

' 230 Fed. Rep. 859. 

' On the assumption that one share of preferred and one share of common 
were equivalent to $100 in cash it was immaterial to the promoters whether 
the manufacturers took cash or stock. If the manufacturers did not want 
stock the promoters had that much more cash to raise, but they retained that 
much more stock. Their profits would not be affected so long as the under- 
lying assimiption held good. 


and one-half million dollars, and at times was considerably 
above. It is not intended to say that the promoters could have 
dispK>sed of their stock during these months and have realized 
$8,500,000; for the sale of some 40 per cent of the total stock of 
the company during a comparatively short period would doubt- 
less have led to a decline in its market value. Yet it is likely 
that around $8,000,000. could have been realized; and for this 
sum practically all of the plants could have been duplicated.^ 
Whether the promoters in fact realized as much as $8,000,000 
depends on how much confidence they had in the creature of 
their creation. The greater their confidence, the less their 
profitSj^since by the fall of 1901 the bubble was pricked. Tin can 
prices, which had steadily advanced in the months following the 
organization of the American Can Company, soon took a decided 
drop, and with them went stock market quotations. 

The International Harvester Company (the harvester trust) 
was organized in 1902 as a consolidation of the five principal 
manufacturers of harvesting machines. Its promotion was 
notable for the comparative absence of promoters' profits or 
even of overcapitalization. The total capitalization of the 
International Harvester Company at its organization was 
$120,000,000, all common stock. This stock was allotted as 
follows: ^ 

For physical property of the five concerns (including bills re- 
ceivable of the MUwaukee Company) * $56^1,055 

For bills receivable and cash of the other four manufacturing 

interests 49,851,803 

For cash ($10,000,000) raised by the bankers 10,000,000 

For organization expenses 749)999 

For commission to the bankers 2,957,143 

Total stock issue $120,000,000 

Of the total capital stock nearly half ($56,441,055) was issued 

* 230 Fed. Rep. 870-871. 

* Unless indeed they held their stock for a number of years. 

' Calctilated from a table in the Report of the Commissioner of Corpora- 
tions on the International Harvester Company, p. 86. 

* The Milwaukee Harvester Company was purchased as a going concern. 


in return for the physical properties of the five companies (in- 
cluding bills receivable in the case of the Milwaukee company). 
The value of these properties as appraised by the organizers was 
approximately $67,000,000; as determined by the Bureau of 
Corporations only about $49,000,000.^ Neither of these valua- 
tions, however, made any allowance for good will. It is clear, 
therefore, that the purchase price was substantially reasonable. 
Another block of the stock ($49,851,803) went to the McCor- 
mick, Deering, Piano, and Warder interests in exchange for cash 
subscriptions. In considerable measure these cash subscriptions 
took the form of an assignment to the International Harvester 
Company of bills receivable guaranteed by the vendor com- 
panies; but a considerable amount of cash was raised in addition.* 
The bills receivable being guaranteed, there was no stock infla- 
tion on this score. 

The balance of the stock ($13,707,142) went to J. P. Morgan 
and Company, the bankers. This sum, it should be observed, 
does not include the $3,148,197 of stock given to the bankers in 
exchange for the Milwaukee Harvester Company, which was 
acquired by the bankers on behalf of the combination, and for 
which the bankers received stock equal to the actual value of 
the company as a going concern. What service did the bankers 
perform in return for this large issue of stock? In the first place, 
they agreed to subscribe to $10,000,000 of the stock of the 
company at par.^ In the second place, they incurred certain 
expenses in the formation of the company. These expenses, 
amounting to $749,999, were covered by a specific allotment of 
stock, which is included in the $13,707,000. The balance of the 
stock received by them ($2,957,143) represented therefore their 
commission as bankers. Was this commission excessive? The 
Bureau of Corporations maintained that it was. It pointed out 

» Cf . p. 236. 

' Report on the International Harvester Company, p. 77. Companies 
selling harvesting machines have unusually laige bills receivable because of 
the necessity of granting long terms of credit. 

' They originally agreed to raise $19^00,000, but the amount was later 
reduced to $10,000,000. 


that since this payment to the bankers did not correspond to any 
property conveyed or expenses incurred, it could be justified 
from the point of view of the company only on the ground of 
merger value — ^which did not materialize in the early life of the 
company — or on the ground of the value of an alUance with the 
firm of J. P. Morgan and Company.^ Even on this score, that is, 
disr^arding the welfare of the public, it held the payment to be 
excessive. As bearing on this matter it should be borne in mind 
that the risk of the bankers was comparatively sUght. The 
bankers acted largely as the agents of a very small group of 
manufacturers, who were anxious to effect a combination, and 
who were in a position to deUver the requisite properties, since 
the stock of the companies was closely held. Moreover, the 
bankers assumed no obligations as underwriters, since payment 
for the properties was taken by the manufacturers in the form of 
stock. The main contribution of the bankers, therefore, outside 
of the purchase of the Milwaukee Company and the organiza- 
tion of the Harvester Company (for which services they were 
specifically remimerated) was the raising of $10,000,000. For 
this cash they did not, as was conmion in trust promotions, 
receive $200 in stock for each $100 in cash; they merely re- 
ceived stock dollar for dollar. The vital question, therefore, is: 
what was the value of the stock for which they subscribed at 
par? Was it anticipated that the organization of the trust 
would result in increased profits? In that case their commission 
was undoubtedly excessive. On the other hand, was there 
danger that the stock would fall below par? In that event their 
commission may have been distinctly moderate. The Report of 
the Bureau of Corporations did not discuss this question, and the 
lack of quotations for the company's securities during the early 
years makes it difficult to return a satisfactory answer. The 
fact is, however, that the profits of the Harvester Company dur- 
mg its early year? were rather low, and its dividend payments 
distinctly low. It would appear, therefore, that the bankers did 
take considerable risk. It is conceivable that the company might 
have been able to avoid the issuance of the $3,000,000 of stock 
^ Report on the International Harvester Company, pp. 127-128. 


that represented the bankers' commissions by the saleof $10,000,- 
000 of stock at par to the public (which ordinarily receives no 
commission), but in view of the fact that a great mass of un- 
digested trust securities was then hanging over the market this 
is by no means certain. In any event, it is clear that the pro- 
moters' profits in the formation of the harvester trust were dis- 
tinctly small as compared with the other trusts of its size that 
were organized during the same period. 

The profits of the promoters of a number of other trusts will be 
briefly reviewed. Unless stated to the contrary it should be 
understood in each instance that these profits are subject to 
some deductions for promotion expenses. They do not ordina- 
rily, therefore, represent net profits. 

The promoter of the starch trust (1890) secured options on a 
number of plants and raised $1,545,750. In return he received 
securities (bonds and stocks) that had an average market value 
during the first two years of the company's life of $2,268427. 
His nominal profits, therefore, were $722,677.^ 

The promoters of the rubber boot and shoe trust (1892) re- 
ceived $1,300,000 of common stock, which at the average quota- 
tions during the first year had a value of approximately $560,000. 
Out of this sum the promoters had to .meet organization expenses, 
but unlike many promotions their risk was small, since the 
amount of stock they received did not depend on their skill as 
bargainers, but was a definite percentage (5 per cent) of the 
total issue of stock. ^ 

The promoters and financial backers of the glucose trust (1897) 
raised $4,500,000 in cash; and were given approximately $14,- 
500,000 in securities, or over 38 per cent of the total issue. The 
average market value of this stock was $9,000,000; and the 
paper profit was therefore $4,500,000.' 

The promoters of the malt trust (1897) received $500,000 in 
preferred stock and $7,750,000 in common stock (or nearly one- 
third of the total capitalization) to cover the expenses of promo- 

' Dewing, Corporate Promotions and Reorganizations, pp. 53-55. 
* Industrial Commission, XIII, pp. 48-49. 
' Dewing, op. cit., p. 82, 


tion. These securities were worth nearly $3 ,400,000 at their max- 
imum quotations, but they declined rapidly and as a result most 
of the promoters made but sUght profits.^ 

The promoters of the silver-ware trust (1898) received only 
$600,000 of conunon stock (equal to 3 per cent of the total capital- 
lization), and out of this they had to meet the expenses of organ- 
ization.^ The market value of this stock during the first year was 
only about $100,000. It is dear, therefore, that the profit was 

The promoters of the asphalt trust (1899) took their pay in 
considerable measure through the sale to the trust at fancy prices 
of a company which they organized for that particular purpose.^ 
The properties of this company cost them $618,000; and they 
sold them to the trust of their creation for $3,670,000 in bonds, 
or more than five times their cost. In addition, as manufac- 
turers they received bonds exceeding by nearly $2,500,000 the 
value of the properties transferred to the trust. Their profits as 
promoters were thus the realizable value of some $3,000,000 of 
bonds. The average price at which these bonds first sold was 
around $93, but the promoters could not have sold all of their 
bonds at this price without spoiling the market. There can be 
little doubt, however, that their profits were handsome. 

The promoter of the bicycle trust (1899) after effecting the req- 
uisite transfer of securities for properties retained as his com- 
pensation $2,000,000 in debenture bonds, $2,600,000 in preferred 
stock, and $6,700,000 in conunon stock, or a total of $11,300,000 
(equal to 31 per cent of the company's capitalization). This 
does not include such profits or losses as might have been made 
by the imderwriting syndicate which supplied the requisite 
funds in return for bonds at 92^^ cents on the dollar. Notwith- 
standing the fact that most of the manufacturers attested 
their faith in the company by taking securities, the promoter, 
because of the sudden collapse of the industry, realized only a 
small profit.^ 

The promoters and bankers that organized the cotton yam 

* Dewing, op. dt., pp. 276, 279. ' Dewing, op. dt., pp. 428-430. 

* Industrial Commission, I, p. 1068. * Ibid., pp. 253-254. 


trust (1899) received nearly all the common stock ($5,000,000). 
The consolidation did not prove successfiJ, and as a result the 
promoters realized no profit at all.^ Substantially the same was 
true of the cotton duck trust, organized in 1901. The promoters 
of this trust after meeting the initial organization expenses had 
left $6,250,000 of common stock, of a value of at least $1,500,000. 
Having confidence in the company they not only retained this 
stock, but bought more; and in the end they sustained heavy 

In the promotion of the foregoing trusts promoters' profits 
figured more or less prominently. In the organization of a niun* 
ber of other trusts, however, promoters' profits were insignificant 
or even entirely absent. This appears to be true of the oil, pow- 
der,^ sugar, cash register, cordage, leather, aluminum, wall paper, 
shoe machinery, news print paper, glass table ware, and salt 
trusts. In the formation of some of these trusts, notably the 
sugar trust, large profits were made by the organizers, but these 
profits came to them as the owners of stock rather than as pro- 
moters. In the formation of others, notably the cordage and 
leather trusts, there was some imderwriting of securities, but this 
was a detail in the formation of the trust rather than an important 
contributing cause. How, it may be asked, was it possible to 
organize this large number of important trusts without offering 
large rewards to the promoter, who is supposed to perform a nec- 
essary function? The answer is two-fold: (i) some trusts became 
such through the expansion of a concern already in the field, 
rather than through a combination at one time of most of the 
plants in the country. For instance, the Standard Oil Company, 
organized in 1870 to take over the business of the partnership to 
which it succeeded, bought first this property and then that, 
financing these purchases partly out of its enormous earnings, 
partly out of cash subscribed by the stockholders, and partly by 
an exchange of securities. Obviously no trust promoter was 

* Dewing, op. dt, p. 313. 
*Ibid., p. 341. 

' There were laige promoters' profits in the reorganization of this trust io 
1902; but none in the original organization. 


quired to create a trust developed in this fashion. (2) Some 
trusts, the news print paper trust, for example, were established 
with the aid of promoters who took no pay for their services; 
Their willingness to perform the service — they incurred no risk — 
may have been because they anticipated that the gain to them 
as manufacturers would be sufficient; or it may have been be- 
cause they r^arded the task as an opportunity to be of service 
to their trade, and the honor as a sufficient reward. 

As a result of the foregoing study the conclusion would appear 
to be abimdantly justified that the prospect of securing promo- 
tion profits has contributed markedly toward the formation of 
numerous trusts. It played a lesser part, however, than the hope 
of achieving monopoly prices. A number of trusts, as we have 
seen, were organized without promoters' profits; whereas few, 
if any, were organized without the anticipation at least of 
monopoly gains. 




The law relating to combinations and trusts is of two kinds — 

first, common law, and second, statute law. Statute law, in 
turn, may be either that of the states or of the federal government. 
Though we are concerned in this treatise mainly with the devel- 
opmentof statute law (and particularly of federal law), a brief 
consideration of the common law decisions of the courts will be 
advantageous, especially since the Supreme Court in the Standard 
Oil case held that the term "restraint of trade" as used in the 
Sherman Act should be construed as declaratory of the common 
law on this subject.* Common law, it may be said, imports a sys- 
tem of imwritten law, not evidenced by statute. Its soiurces are 
found in the usages, habits, manners, and customs of a people; its 
seat, in the breast of the judges who are its expounders.' Com- 
mon law yields to statute law, where such exists, yet imtil the 
late eighties there were very few state statutes dealing with in- 
dustrial combinations and trusts, and imtil the passage of the 
Sherman Act in 1890 there was no federal statute. It was there- 
fore only to be expected that a considerable body of common 
law doctrine had developed with respect to restraints of trade 
and combinations of one type or another. 
The rule was early established in English law that contracts or 
' agreements in restraint of trade were void, and therefore non- 

* On this topic see the Report of the Commissioner of Corporations on 
Trust Laws and Unfair Competition, chs. 2, 7; and Goodnow, Trade Com- 
binations at Common Law, Political Science Quarterly, 12, pp. 212-245. 
The author has made liberal use of these works in preparing this chapter. 

' Cf. remarks of Senator Hoar in Cong. Record, April 8, 1890, p. 3152. 

' Judicial and Statutory Definitions of Words and Phrases, second series, 
p. 810. 



enforceable. The courts refused to recognize the validity of any 
restraint of trade, no matter how limited its scope. The cases 
which came before them in the early daj^ involved principally 
the right of an individual, in disposing of his business, to agree 
not to reenter that same business. The courts took the position 
that in the interest oi trade an individual should not be allowed 
to contract that he would stay out of the business in which he 
had been engaged. Subsequently, however, this rule was relaxed. 
In MUchdt v. Reynolds (1711) an English court held that while 
general restraints of trade were void, a restraint limited to a par- I / 
ticular place might under certain circimistances be enforceable.^ ^ 
Though American courts, following Mitchell v. Reynolds, have in 
many cases held that an agreement involving a restraint covering 
an entire state is void as a general restraint,^ still the cases are 
numerous in which American courts have upheld particular 
restraints when the restraint was regarded as reasonable.' 
The modem rule was well stated in Hubbard v. Miller, " If, con- 
sidered with reference to the situation, business and objects of 
the parties, and in the light of ail the surrounding circumstances 
with reference to which the contract was made, the restraint 
contracted for appears to have been for a just and honest pur- 
pose, for the protection of the legitimate interests of the party 
in whose favor it is imposed, reasonable as between them and not 
q)ecially injurious to the public, the restraint will be held valid. " * 
Gradually, therefore, the principle became established at common 
law that agreements connected with the sale of a business were 
not necessarily void, even though thereby a restraint of trade was 
effected, providing the restraint was reasonable in character. 

» I P. Wms. 181 (1711). 

* Sec Lawrence v, Kidder, 10 Barbour (New York) 641 (1851); Taylor v. 
Blanchaid, 95 Massachusetts 370 (1866); Western Woodenware Association 
V. Staikey, 84 Michigan 76 (1890). 

*See Bowser v. Bliss *et al., 7 Blackford (Indiana) 344 (1845); Duffy 0. 
Sbockey, 11 Indiana 70 (1858); Beal v. Chase, 31 Michigan 490 (1875); 
Whitney v. Slay ton, 40 Maine 224 (1885); Diamond Match Company v. 
Roeber, 106 New York 473 (1887); Robinson v. Suburban Brick Company, 
127 Fed. Rep. 804 (1904). 

^ 27 Michigan 19 (1873). 


The next class of cases to be described (we are following here 
the classification adopted in the report of the Commissioner of 
/ Corporations on Trust Laws) is that relating to agreements 
among competitors to restrict competition or to form a combin- 
ation, but not including such restriction of competition as re- 
sults from the formation of a trust. The latter will be described 

Agreements to restrain competition, as pointed out in the 
chapter on Pools, may be of various sorts. They may be in- 
formal, as, for example, the gentlemen's agreements, or they 
may be quite formal, with provisions for penalties in the event 
of a failure to observe the agreement. The agreements may^ 
look toward the control of the supply, the limitation of the out- 
put, the fixing of prices, the pooling of profits, or the division of 
territory. Whatever their form, they were void imder the 
common law when they imdiJy restrained competition, and 
were therefore detrimental to the public interest. No rule for 
the determination of what constituted undue restraint under 
the common law was laid down; the common law doctrine was 
that each case should be settled in the light of the facts. 

The state of the common law can best be indicated by dting 
a few representative cases, some of them illustrating invalid 
agreements, and some valid agreements. 

Invalid AgreetnetUs ^ 

India Bagging Association v. B, Kock and Company? Ei^t 
firms had formed an association for the sale of India bagging, 

* See also Craft r. McConoughy, 79 Illinois 346, (1875); Amot v. The 
Pittslon and Elmira Coal Company, 68 New York 558 (1877); Santa Clara 
Valley Mill and Lumber Company v, Hayes, 76 California 387 U888); 
Anderson r. Jett, 89 Kentucky 375 (1889); Samuels v. Oliver, 130 IlHnois 73 
(1889); Emery v. Ohio Candle Company, 47 Ohio State 320 (1890); Strait v. 
National Harrow Company, 18 New York Supplement 224 (1891); The 
Texas Standard Oil Company t». Adoue, 83 Texas 650 (1892); Oliver v. Gil- 
more, 52 Fed. Rep. 562 (1892); Bohn Manufacturing Company v. Hollis, 

* 14 Louisiana Annual Reports 168 (1859). 


the bagging to remain the property of the individual members. 
Each firm agreed not to sell any bagging for a period of three 
months, except with the consent of the majority, imder a 
penalty of $10 for every bale sold. The manager of the associa- 
tion broug^suit against one of the members for having sold 
740 bales of bagging, in contravention of the articles of the 
association. The Court held that the agreement entered into 
was palpably and unequivocally a combination in restraint of 
trade, and to enhance the price of an article of primary necessity 
to cotton planters; and that it was contrary to public order, and 
might not therefore be enforced in a court of justice. 

Morris Run Coal Company v. Barclay Coal Company.^ Five 
coal companies in Pennsylvania had entered into an arrange- 
ment in New York by which they agreed to divide among 
themselves in certain proportions the market for the bitimiinous 
coal produced in the two coal regions controlled by them; and to 
appoint a committee to take charge of their business. The 
committee was empowered to adjust the prices of coal in the 
different markets, and the rates of freight, and to enter into 
agreements with the anthracite coal companies. Provision was 
made for the mining of coal and its delivery in the different 
markets at such times and to such parties as the committee 
might direct, and for the sale of the coal through a general sales 
agent to be appointed by the committee, and to be stationed in 
New York state. However, the companies were allowed to sell 
the coal themselves, provided they did not exceed the propor- 
tion allotted to them, and provided they sold at the prices fixed 
by the conmiittee. In an action on a draft, given in furtherance 
of the agreement, the Court held that the contract was Void 
under the conmion law, being in restraint of trade and against 
public policy. It was also held to be void on the groimd that 

54 Minnesota 223 (1893); Nester v. Continental Brewing Company, 161 
Pennsylvania State 473 (1894); Charleston Natuial Gas Company 9. Kana- 
wha Natural Gas, Light and Fuel Company, 58 West Virginia 22 (1905); 
Pocahontas Coke Company v, Powhatan Coal and Coke Company, 60 West 
Viigfaua 508 (igo6). 
*68 Pennsylvania State 173 (1871). 



it violated a New York statute prohibiting conspiracies to 
commit an act injurious to trade or commerce. 

The Central Ohio Salt Company v. Guthrie} Practically all 
the salt manufacturers in the Hocking and Muskingum valle3rs, 
Ohio, had formed a voluntary association for the express piupose 
of regulating the price, and sustaining the quality of salt. By the 
articles of association, all salt manufactured or owned by the 
members became the property of the Central Ohio Salt Company 
as soon was packed into barrels. The members of the 
association were then prohibited from selling any salt except by 
retail at the factory, and except at prices fixed by the company. 
The proceeds of sales were turned over to the members in pro- 
portion to the amount of salt received from each. For some 
time after the organization of the association the defendant 
complied with the agreement, but subsequently he refused to 
deliver to the company the output of his furnace. Whereupon 
the Central Salt Company brought suit to enforce the agree- 

The judge pointed out that while it was well settled that all 
contracts in partial ^ restraint of trade were not void as against 
public policy, it was as fully established that contracts in 
general ^ restraint were against public policy, and therefore ab- 
solutely void. " Public policy," -he sftid> " unquestionably, favors 
competition in trade, to the end that its commodities may be 
afforded to the consmner as cheaply as possible, and is opposed 
to monopolies,, which tend to advance market prices, to the 
injury of the general public." The Court held that the clear 
tendency of the agreement before it was to establish a monopoly, 
and to destroy competition in trade, and for that reason, on 
groimds of public policy, the Court would not aid in its enforce- 
ment. To say that competition in the salt trade was not de- 
stroyed, or that the price of the commodity was not unreason- 
ably advanced was no answer; it was enough that the inevitable 
tendency of such contracts was injurious to the public. 
'^ Raymond v. Leavitt.^ The plamtiff had lent the defendant 

» 35 Ohio State 666 (1880). « Italics supplied by the author. 

^ 46 Michigan 447 (1881). 


SiOjOoo for the purpose of controlling the wheat market at 
Detroit, the intent being to force up prices. The defendant was 
to give the plaintiff one-third of the profits, and at all events to 
rq>ay the principal. The Court held that the object of the 
arrangement between the parties was to force a fictitious and 
unnatural rise in the wheat market for the express purpose 
of getting the advantage of dealers and purchasers. The Court 
declined to enforce such a contract. It held that if people saw 
fit to invest their money in such ventures, they must get it back 
by some other than legal measures. 

De Witt Wire-Cloth Company v. New Jersey Wire-Cloth 
Company} Five concerns engaged in the manufacture and 
sale of wire cloth entered into an agreement whereby, for the 
avowed purpose of regulating the price of wire cloth, they formed 
themselves into an association, agreed that they would not sell 
below stipulated prices, and subjected themselves to a heavy 
penalty for the violation of the agreement. The Court held that 
the inevitable effect of this agreement was to restrict competi- 
tion in trade, and to enhance arbitrarily the price of a commod- 
ity of commerce; and it was a settled principle in the jurispru- 
dence of this country that such a contract was repugnant to 
public policy, and thus unlawful. The Court held that the 
people had a right to the necessaries and conveniences of life at 
a price determined by the relation of supply and demand, and 
the law forbade any agreement or combination whereby that 
price was removed beyond the salutary influence of legitimate 

Chapin v. Brown Brothers,'^ The grocery men of Storm Lake, 
Iowa, finding the business of purchasing and retailing butter 
burdensome, and believing that the business could be handled 
more satisfactorily by one concern making this its exclusive 
affair, agreed with the firm of D. and E. Chapin that for a period 
of two years they would buy no more butter or take none in trade, 
except for the use of their own families. The Chapin firm in 
accordance with this agreement established a store in Storm 

* 14 New York Supplement 277 (1891). '83 Iowa 156 (1891). 


Lake. Notwithstanding the agreement the defendants sub- 
sequently opened a butter store. The Chapin concern brought 
suit to enforce the agreement. 

The Court refused to enforce the agreement on the ground 
that it lacked consideration, and that it was against public 
policy. The Court held that it plainly tended to monopolize 
the butter trade of Storm Lake, and to destroy competition 
in the business. By this decision an agreement against public 
policy was declared void, even though it applied to purchase 
rather than sale, and even though it resulted in no disadvantage 
to the consuming public generally, the parties injured being the 
producers of butter. 

More v. Bennett} The law stenographers of the dty of Chi- 
cago had formed an association, the object of which was to estab- 
lish and maintain uniform rates for stenographic work done by 
the members of the association. A schedule of rates had been 
drawn up, but it had not been observed by the defendant, so the 
plaintiff alleged. The Court, however, refused to award dam- 
ages. It held that one of the leading objects of the association, if 
not its leading object^ was to control the prices to be charged by 
its members by restraining all competition between them; and 
the agreement was thus so obnoxious to public policy as to render 
it improper for the courts to lend their aid to its enforcement. 
This decision is significant in that the Court applied the same 
rules to agreements regulating the price of labor as were applied 
by the courts generally to agreements regulating the price of 

The People of the State of New York v. The MUk Exchanged 
The Milk Exchange had some ninety stockholders, most of 
whom were either milk dealers in the city of New York or 
creamery and milk commission men in the vicinity. At the 
first meeting after its incorporation it adopted a by-law which 
provided that the board of directors should have power to fix 
the price at which milk was to be purchased by the stockholders. 
The directors accordingly fixed the price of milk from time to 

» 140 Illiuois 69 (1892). 2 145 New York 267 (1895). 


time, and the prices thus established largely controlled the 
market in New York and vicinity. The Attorney General of the 
state brought suit to have the charter of the company forfeited. 
The Court granted the relief requested. It held that the evi- 
dence justified a finding that the Milk Exchange was a combina- 
tion inimical to trade, and thus unlawful. That the purpose of 
the combination may have been to reduce the price of milk made 
no difference. The price was fixed for the benefit of the dealers, 
not the consumers; and the logical effect of the fixing of prices 
by the combination was to paralyze the production and limit the 
supply, and thus to leave dealers in a position to enhance the 
price to be paid by consumers. 

Slaughter v. Thacker Cod and Coke Company.^ The Thacker 
Coal Company had been organized in 1895 for the sole purpose of 
acting as the sales agent of the Thacker Coal and Coke Com- 
pany, and two other coal mining concerns. The Thacker Coal 
Company entered into a contract with the Thacker Coal and 
Coke Company, whereby it agreed to sell for the latter at least 
20,000 tons of coal a year for five years, at a commission of 10 
cents per ton. The Coal and Coke Company agreed to deliver 
to the selling corporation as much coal as the latter could sell, 
but not to exceed 84,000 tons a year. The mining concem agreed 
to pay 10 cents per ton as liquidated damages, should it fail to 
deliver coal according to the agreement. Selling prices were 
fixed in the agreement, and were not to be changed without the 
consent of the three producing companies. In 1896 the Thacker 
Coal and Coke Company refused to deliver any more coal under 
the contract. The receiver for the Thacker Coal Company 
thereupon brought suit against the Coal and Coke Company for 
damages. The Court pointed out that the modem rule at 
common law was that contracts in restraint of trade were 
enforceable, if they did not unreasonably restrain trade. But 
the contract before it, though relating to only an insignificant 
part of the coal produced in the state, was held to be illegal as 
tending to injure the public; and therefore no recovery could be 
had on it. 

* 55 West Virginia 642 (1904). 


Valid Agreements ^ 

Skrainka v. Scharringhausen,^ Twenty-four owners and 
operators of stone quarries in a section of St. Louis, desiring to 
effect a sale of their stone at "uniform prices and living rates," 
had entered into an agreement, which was to last for six months. 
The agreement made provision for the appointment of an ex- 
clusive sales agent, who was to apportion the output among the 
quarries and to sell the stone at specified prices. The defendant, 
who had violated the agreement, and thus incurred a j)enalty, 
contended that the agreement was in restraint of trade, and not 
enforceable at law. The Court pointed out that the old doctrine 
of the common law, declaring that contracts in restraint of trade 
were void, was no longer to be insisted upon as rigorously as it 
had been in the earlier cases. Every agreement in restraint of 
trade was no longer illegal. When a contract injured the parties 
making it, by diminishing their means for supporting their 
families; when it tended to deprive the public of the services of 
useful men; when it discouraged industry, diminished produc- 
tion, prevented competition, enhanced prices, and when, being 
made by large companies or corporations, it excluded rivalry and 
engrossed the markets — that is, tended to " make a comer" — ^it 
was against the policy of the law. But restraints upon trade 
imposed by agreement, under limitations as to locality, time, and 
persons, were not necessarily restraints of trade in the general 
sense, and thus objectionable. Appl)dng this principle to the 
case before it, the Court said, "The agreement is among the 
quarrymen of one district of one city, and it does not appear 
that it embraces all of them. There is no evidence that it works 
any public mischief, and the contract is not of such a nature that 
it is apparent from its terms that it tends to deprive men of 
employment, unduly raise prices, cause a monopoly, or put an 
end to competition. It is limited both as to time and place; and 

» See also Long v. Towl, 42 Missouri 545 (1868); Gloucester Isinglass and 
Glue Company v. Russia Cement Company, 154 Massachusetts 92 (1891); 
and Matthews v. Associated Press, 136 New York 333 (1893). 

*8 Missouri Appeals Reports 522 (1880). 


we know of no case in recent times in which a contract such as 
the one before us has been declared illegal." 

Ddph V. Troy Laundry Machinery Company.^ The plaintiff 
and the defendant were the two leading manufacturers of wash- 
ing machines in the United States. In order to avoid the conse- 
quences of competition with each other, and to secure better 
prices and larger returns, they had entered into a five-year agree- 
ment to divide profits. The Dolph concern was to have the 
option of manufacturing all machines sold by both parties, and 
the Troy concern agreed to take a certain number of machines 
annually. The Troy concern having terminated the contract 
prior to its expiration, the Dolph concern brought suit to recover 
damages. The Court held the agreement valid. As its decision 
seems to have taken a different turn from the great majority of 
cases, we quote at some length. 

"Assuming that, in entering into the contract, the parties 
contemplated that the defendant should cease manufacturing 
machines, and buy all its machines from the plaintiff, and that 
the only purpose in view was to promote the interests of the 
parties, and enable them to obtain from customers higher prices 
for the machines, it is not obvious how such a contract con- 
travenes any principle of public policy. Washing-machines, 
although articles of convenience, are not articles of necessity. 
The scheme of the parties did not contemplate suppressing the 
manufacture or sale of machines by others. Those who might be 
unwilling to pay the prices asked by the parties could find plenty 
of mechanics to make such machines, and the law of demand and 
supply would effectually counteract any serious mischief likely 
to arise from the attempt of the parties to get exorbitant prices 
for their machines. It is quite legitimate for any trader to 
obtain the highest price he can for any commodity in which he 
deals. It is equally legitimate for two rival manufacturers or 
traders to agree upon a scale of selling prices for their goods, and 
a division of their profits. It is not obnoxious to good morals, or 
to the rights of the public, that two rival traders agree to consoli- 
date their concerns, and that one shall discontinue business, and 

1 28 Fed. Rep. 553 (1886). 


become a partner with the other, for a specified term. It may 
happen, as the result of such an arrangement, that the public 
have to pay more for the commodities in which the parties deal ; 
but the public are not obliged to buy of them. Certainly, the 
public have no right to complain, so long as the transaction falls 
short of a conspiracy between the parties to control prices by 
creating a monopoly." 

Central Shade-Roller Company v. Cushman} Three manu- 
facturers of shade-rollers, each possessing different letters patent, 
had, for the purpose of avoiding competition, organized the 
Central Shade-Roller Company, and severally entered into an 
agreement with it that all sales of shade-rollers should be in the 
name of the Central Company, and should be at once reported to 
it. It was further provided in the agreement that the prices for 
rollers of the same grade should be the same, the price to be 
according to a schedule contained in the contract, subject to 
changes made by the company on the recommendation of 
three-fourths of the stockholders; and that when either party . 
should establish an agency in any city for the sale of a particular 
roller, no other party should take orders for the same roller in 
the same place. The Central Shade-Roller Company alleged 
that the defendant had broken the contract, and prayed for 
an injimction to restrain the defendant from selling rollers in 
violation thereof. 

The Court upheld the agreement. It held that the contract 
put no restraint upon the production or sale of shade-rollers; 
on the contrary its apparent purpose was, by making prices more 
uniform and regular, to stimulate production. Moreover, the 
agreement did not refer to an article of prime necessity, nor to a 
staple of commerce, nor to merchandise to be bought and sold in 
the market, but to a particular curtain fixture of the parties' own 
manufacture. Finally, the agreement did not aim to affect 
competition from outside, — the parties had a monopoly by their 
patents, — ^but only to restrict competition in price among the ^ 
members. Even if it were true that the agreement tended to 

* 143 Massachusetts 353 (1887). 


raise the price of the commodity, it was, nevertheless, one which 
the parties had a right to make. But the Court refused to 
assume that the purpose and effect of the combination was to 
raise unduly the price of the commodity. It held that its natural 
eflFect would be the maintenance of a fair and uniform price, and 
the prevention of the injury to producers and consimiers result- 
ing from fluctuating prices, in turn the result of undue competi- 
tion. The question would be different, said the Court, if it 
api>eared that the combination was used to the public detriment. 
The contract being apparently beneficial to the parties and not 
necessarily injurious to the public, the Court declined to hold it 
invalid as a restraint of trade, or against public policy. 

It is doubtful whether the principle laid down in this case is 
sound. In United States v, Addyston Pipe and Steel Company, 
a federal court, discussing the shade-roller case, said that it was 
there held that contracts in restraint of trade are not invalid if 
they affect trade in articles which, though useful and convenient, 
are not articles of prime or public necessity. But "we think the 
cases hereafter cited show that the common law rule against 
restraint of trade extends to all articles of merchandise." ^ 

"trustee device" cases 

We now come to the common law cases dealing with trusts. 
These trusts, as we have seen, at one time took the form of a 
"trust" agreement or a trustee device, but later took the form of 
a corporate combination. The cases declaring the " trust " agree- 
ment illegal will be first considered.^ 

Mallary v. Hanaur Oil-Works,^ This was one of the first cases 
involving a " trust " agreement. In July, 1 884, four corporations 
manufacturing cotton seed oil at Memphis, Tennessee, entered 
into a contract. They agreed to turn over to a committee, com- 
posed of representatives of each corporation, the properties and 

» 85 Fed. Rep. 286 (1898). 

* See also Pittsburg Carbon Company (Ltd.) v. McMillin, 119 New Yorfc 
46 (1890); and Bishop v. American Preservers' Company, 157 Illinois 284 

' 86 Tennessee 598 (1888). 


machinery of each mill. These properties were to be managed 
for the common benefit by the committee (it went under the name 
of the "Independent Cotton-Seed Association"); and the profits 
and losses were to be divided among the corporations according 
to definite proportions. This arrangement was to last one year, 
but it might be renewed for two additional years; and in fact was 
renewed at the end of the first year. Prior to the expiration of 
the agreement the Hanaur Oil- Works p>assed a resolution declar- 
ing the contract void, as being ultra vires, and directed its pres- 
ident to resume possession of the mill. The association refused 
to turn over the mill, whereupon suit was brought by the Hanaur 
Oil- Works to recover possession. 

The Court held that the agreement entered into was a con- 
tract of partnership between corporations; that the Hanaur Oil- 
Works under its charter had no power to enter such a partner- 
ship; that the contract was therefore void; and that consequently 
the company might resume possession of its property. The 
Court did not deem it necessary to consider the question of the 
legality of such a combination of corporations as one tending 
to create a monopoly, though it pointed out that the question 
thus raised was a grave one. 

State V. Nebraska Distilling Company.^ The Nebraska Dis- 
tilling Company had entered the Distillers and Cattle Feeders* 
Trust in 1887, but its plant, though it had formerly been oper- 
ated at a profit, was closed by order of the trustees. Subse- 
quently at a meeting of the stockholders of the Nebraska Dis- 
tilling Company the directors were authorized to sell the 
company's property, to cancel all the stock outstanding, and 
to dissolve the corporation. The state thereupon brought suit 
to obtain a forfeiture of the corporate franchise of the company. 
The Court held that the object of the Nebraska Distilling Com- 
pany in entering the illegal combination was to destroy com- 
petition, and create a monopoly; that any contract entered into 
with such an object was, imder the laws of the state, null and 
void; that the conveyance from the distilling company to the 
trust was in contravention of the authority conferred by law 

* 29 Nebraska 700 (1890). 


upon that company, in excess of the powers granted by its 
charter, and against public policy and void; and that no title had 
passed by such conveyance. The Court further held that the cor- 
porate franchise, having been abused, would be annulled; and 
that the property of the Nebraska Distilling Company, being 
within the jiuisdiction of the Court, would be disposed of in 
such manner as justice required. 

The People of the State of New York v. The North River Sugar 
Refining Company } The organization of the Sugar Refineries 
Company in 1887 has already been described.^ In 1888 the 
Attorney General of New York brought suit against the North 
River Sugar Refining Company, alleging that the entry of the 
company into the trust justified the vacating of its charter. 

The Court held it that could not be denied that the North 
River Sugar Refining Company had became an integral part of 
a combination which possessed over it absolute control. The 
defendants, however, alleged that this outcome was the result 
of action by the stockholders and not by the corporation, and 
that therefore the penalty of dissolution should not be visited 
upon the corporation. But the Court held that there might be 
actual corporate conduct without formal corp)orate action. It 
pointed out that the stockholders at a meeting had unanimously 
adopted a resolution favoring the establishment of the "trust", 
and had entered into an agreement to transfer their shares of 
stock to the trustees. The stockholders in acting collectively, as 
an aggregate body, without the least exception, had reached re- 
sults clearly corporate in character, and they could not escape 
the consequence of their acts by pleading the innocence of a 
convenient fiction, that is, the corporation. It being established 
that the North River Sugar Refining Company had partici- 
pated in the creation of the trust, it was next necessary to deter- 
mine whether this was illegal. The Court held that it was clear 
that the defendant had accepted from the state the gift of cor- 
porate life only to disregard the conditions upon which it had 
been given; that it had received its powers and privileges merely 
to put them in pawn; that it had given away to an ir- 

* 121 New York 582 (1890). * Cf. p. 22. 


responsible board its entire independence and self-cx)ntrol. 
Its stockholders had parted with the control which the 
charter gave them and the state required them to ex- 
ercise. And graver still was the fact that the corporation 
had helped to create an anomalous trust, which was in substance 
and effect a partnership of twenty separate corporations; and it 
was a violation of the law for corporations to enter into a partner- 
ship. The Court therefore declared that the charter of the com- 
pany should be forfeited, and its corporate existence annulled. 
The Court indulged in a dictiun as to the injiuious effects of 
monopolies upon the public, but did not decide the case on that 
groimd, holding that it was needless in this instance " to advance 
into the wider discussion over monopolies and competition and 
restraint of trade and the problems of political economy." 

State V. Standard Oil Company.^ We have already described 
at some length the Standard Oil "trust" agreement of 1882.^ 
The Supreme Court of Ohio in a decision rendered in 1892 de- 
clared the agreement illegal. In a line of reasoning similar to 
that of the New York court in the North River Sugar Refining 
Company case, it held that the action of the stockholders of the 
Standard Oil Company in turning over their shares to the trus- 
tees provided for in the agreement had affected the property and 
business of the Standard Oil Company in the same manner as if 
it had been a formal resolution of the board of directors, and that 
their acts should be regarded as the acts of the corporation. And 
the nature of the agreement was such as to preclude the Standard 
Oil Company of Ohio from becoming a party to it. The law re- 
quired that a corporation should be controlled and managed by 
its directors in the interests of its own stockholders, and conform- 
able to the purpose for which it was created by the laws of the 
state. But by the agreement entered into the defendant was 
controlled and managed by the Standard Oil Trust, an associa- 
tion with its principal place of business in New York, and organ- 
ized for a purpose contrary to the policy of the laws of the state 
of Ohio. "Its object was to establish a virtual monopoly of the 
business of producing petroleum, and of manufacturing, refining 

» 49 Ohio State 137 (1892). « Cf. p. 19. 


and dealing in it and all its products, throughout the entire 
country, and by which it might not merely control the produc- 
tion, but the price at its pleasure. All such associations are con- 
trary to the policy of our state and void." The Coiut therefore 
held that the Standard Oil Company should be forbidden to 
carry out the agreement which it had entered into with the 


The last class of cases deals with the establishment of corpo- 
rate combinations.^ The first of these was: 

Richardson v. Buhl,^ The Diamond Match Company was 
organized in Connecticut in 1880 for the purpose of acquiring all 
the factories in the United States manufacturing friction 
matches, with the intent of monopolizing the business and 
controlling prices. The companies which went into the trust 
exchanged their real estate, machinery, patents, good will, and 
agreements not to reenter the match business for common stock 
in the Diamond Match Company; and agreed to buy preferred 
stock equal to one-half the amount of common stock received, 
the preferred stock to be paid for in matches or match materials 
on hand, or in cash. The Richardson Match Company not 
being in sufficient fimds to buy the preferred stock, borrowed 
money from Buhl, and to secure the repayment of the loan 
endorsed the greater part of the preferred stock over to Buhl, 
with an agreement between the parties as to the division of the 
dividends received on the stock held as collateral. Suit was 
brought by Richardson in connection with this agreement. 

The parties to the suit did not dispute the validity of the 
contract entered into, but the Court, on its own motion, raised 
the question. The Court held that the contract had been 
entered into to aid the Diamond Match Company in carrying 
out the object for which it had been organized, — the monopoli- 
zation of the manufacture of friction matches in the United 

' See also People v. Chicago Gas Trust Company, 130 Illinois 268 (1889); 
and Harding v. The American Glucose Company, 182 Illinois 551 (1899). 
' 77 Midiigan 632 (1889). 


States. But monopoly in trade or in any kind of business, 
according to the Court, was odious to our form of government; 
its tendency was destructive of free institutions, and repugnant 
to the instincts of a free people. The Diamond Match Company 
being unlawful, and the contract in question having been made 
to further its objects and purposes, the contract was void as 
against public policy. 

Distilling and Cattle Feeding Company v. People.^ Reference 
has been made to the organization of the Distillers and Cattle 
Feeders' Trust in 1887.* In 1890, because of court decisions 
holding similar trusts illegal, the corporate form of organization 
was adopted. In 1893 the Attorney General of IHinois brought 
suit against the Distilling and Cattle Feeding Company (the 
corporation which succeeded the "trust")* alleging that the 
company had misused its powers and franchises. 

The Coiut held that no one who intelligently considered the 
scheme of the Distillers and Cattle Feeders' Trust could for a 
moment doubt that it was designed to be, and was in fact, a 
combination in restraint of trade; and that it was organized for 
the purpose of getting control of the manufacture and sale of 
all distillery products, so as to stifle competition, and to be able 
to dictate output and prices, and thus to create or tend to 
create a monopoly. The "trust" was clearly against the policy 
of the law, and it was therefore illegal and void. And the 
corporation had merely succeeded to the trust. Its operations 
were to be carried on in the same way, for the same purposes, 
and by the same agencies as before. The former trustees 
became the directors of the new corporation, and the trust 
certificate holders became its stockholders. The trust being 
repugnant to public policy and illegal, it was impossible to 
see, said the Court, why the same was not true of the corpora* 
tion which succeeded to it and took its place. The control over 
the distillery business of the country, over production and 
prices, and the virtual monopoly formerly held by the trust, were 
in no degree changed or relaxed. The Court concluded, "There 
is no magic in a corporate organization which can purge the 

» 156 Illinois 448 (1895). *Cf. p. ai. 


trust scheme of its illegality, and it remains as essentially 
opposed to the principles of sound public policy as when the 
trust was in existence. It was illegal before, and is ill^al still, 
and for the same reasons." * The judgment of the court below 
ousting the company from its franchises was therefore affirmed. 

The cases outlined in this chapter illustrate fairly the deci- 
sions of the courts of the country, which almost without excep- 
tion have held ill^al all agreements in unreasonable restraint of/ 
trade, and all monopolies or attempted monopolies, irrespective' 
of the form in which they were clothed. The decisions of the 
courts declaring illegal the trust agreements in the cotton seed 
oil, whisky, sugar, oil, and preserving industries, and the corpo- 
rate combinations in the match and whisky industries apparently 
left no loophole under the common law for the establishment of 
industrial monopolies. 

We may now proceed to describe the federal legislation deal- 
ing with combinations and trusts, and the decisions of the courts 
interpreting this legislation. 

^ 156 Illinois 491. 



^ During the years 1882 to 1887 a number of trusts had been 
created. This movement toward industrial monopoly was 
viewed with great concern by the people of the United States, 
and a vigorous demand was made for the enactment of legisla- 
tion that would definitely rfiake these trusts illegal. As Justice 
Harlan said in 191 1 : "All who recall the condition of the coimtiy 
in 1890 will remember that there was everywhere, among the 
people generally, a deep feeling of imrest. The Nation had been 
rid of human slavery — ^fortunately, as all now feel — ^but the con- 
viction was universal that the coxmtry was in real danger from 
another kind of slavery sought to be fastened on the American 
people, namely, the slavery that would result from aggregations 
of capital in the hands of a few individuals and corporations 
controlling, for their own profit and advantage exclusively, the 
entire business of the country, including the production and sale 
of the necessaries of life. " ^ In 1888 both of the leading political 
parties referred in their platforms to the dangers inherent in 
trusts, and demanded action. Thus, the platform of the Re- 
publican party read:*! 

"We declare our opposition to all combinations of capital, 
organized in trusts or otherwise, to control arbitrarily the 
condition of trade among our citizens; and we recommend to 
Congress and the state legislatures, in their respective jurisdic- 
tions, such legislation as will prevent the execution of all schemes 
to oppress the people by undue charges on their supplies, or by 
unjust rates for the transportation of their products to market." ' 

> For a more detailed account of the legislation of this period, see Knauth, 
The Policy of the United States towards Industrial Monopoly. 

* 221 U. S. 83. 

• McKee, The National Conventions and Platfonns of all Political Parties, 
p. 241. 



The Democratic party platform held that " the interests of the 
people are betrayed when, by unnecessary taxation, trusts and 
combinations are permitted to exist, which, while unduly en- 
riching the few that combine, rob the body of our citizens by 
depriving them of the benefits of natural competition." ^ In the 
same year investigations of trusts were provided for by the 
House of Representatives and by the state of New York; and 
numerous bills dealing with combinations and trusts were intro- 
duced in the United States Senate. The op position to trusts 
crystallized in 1890 in the passage on July 2 of the Sherman 
Anti- trust Ac t, — as it Is generally called. 

The coiurse of the act through Congress has been described 
elsewhere,^ and only a brief sketch need be given here. The bill 
was introduced in the Senate by Senator Sherman of Ohio on 
December 4, 1889. It was debated on February 27, March 21, 
March 24-27, and April 8, 1890. TDuring the course of the debate 
Senator George stated his belief that "the sentiment that some- 
thing ought to be done pervades this body almost universally; " ^ 
and it is significant as supporting this view that only one speech 
in opposition to anti-trust legislation was delivered in the Sen- 
ate.^ J Having been revised so completely that it bore little re- 
semblance to the original measiu-e, the bill passed the Senate 
on April 8, by a vote of fifty-two to one, twenty-nine being 
absent.* On May i the bill was taken up in the House, and 
after a short debate was passed with one amendment, the votes 
not being recorded.^ The House amendment did not prove ac- 
ceptable to the Senate, and accordingly a conference became 
necessary. Eventually on Jime 20 by a vote of 242 to o, 85 
not voting, the House agreed to withdraw its amendment.^ The 

* McKee, The National Conventions and Platforms of all Political Parties, 

P- 235. 

'Wal ker, History of the Shenn an La w^ chs. 1- 2, and Knauth, The 

Policy of the United States towards Industrial Monopoly, ch. i. 

' Cong. Record, March 25, 1890, p. 2598. 

* Ibid., March 24, 1890, pp. 2565-66. 

* Ibid., April 8, 1890, p. 3153. 

* Ibid., May i, 1890, p. 4104. 

^ Ibid., June 20, 1890, p. 6312. 


bill was signed by President Harrison on JiJy 2 ; and in its final 
form was identical with the measure as it had passed the Senate 
on April 8. 

The provisions of the act may be briefly simmiarized (the text 
is given in a footnote).^ 

^ An act to protect trade and commerce against unlawful restraints and 

Be it enacted by the Senate and House of Representatives of the United States of 
America in Congress assembled y 

Sec I. Fvftiy rontri^ti Qpmhinatmn in the form of trust or otherwise, or 
conspiracy, in r estraint of trade o r commerce among the several States, or 
with foreign nations, is hereby degjared to be illeg al. Every person w ho shall 
malcq fli^y si\c\\ cont ract or e ya ge in any such combination or con spiracy, 
ttliftH fy ^< H>mpd ginfty o f a^miscie me anor, and, on conviction thereof, shall be 
punished by fine not^cee3ing tove thousand dollars, or by jnaprisonine nt not 
exceediQg_one year, ot by boih ssdll^unisliments, in the discretion*oF the 

Sec. 2. Ev ery person who sh all m pnopolizer or at ^tepfipt tn monojyjizi*^ or 
combine or conspire with any other person or persons, to monopolize .gny 
partjglJJieJbrade or comm erce among the several States, or with foreign 
nat ions^ shaU be deemed guilty of a misdemeanor, an d, on conviction thereof, 

jll^hft piiniRhftd hy fi ne not exce ^f^jng fivf thnnotinH Hnllnrgj or by imprison- 
ment i)s2teS££fiding^one^eaE^r by both said punishments, in the discretion 
of the court. 

Sec. 3. Ev ery contract, comb ination in the form of trust or otherwise, or 
mngpirary^ in n^frg ^jnt pf trad ejojrcomni erce in'any"Territoiy of the United 
S tates or of the District of Columbia. ^ or in rest raint of trade orc ommerce 
be tween any such Territory and another^ or between any s uch Terr itory or 
Ter ritori ffl ?b^ ^"y State or States or ^e District of Coluinbia, or with 
focgigiU2ati(>ns, or between the District of Columbia and any State or States 
or foreign nations, is hereby declared illegal. Every person who shall make 
any such contract or engage in any such conoBination or conspiracy, shall be 
deemed guilty of a misdemeanor, and, on conviction thereof, shall be pun- 
ished by fine not exceeding five thousand dollars, or by imprisonment not 
exceeding one year, or by both said punishments, in the discretion of the 

Sec. 4. Th e severaU arniit r^n'-tg '^f t be United Sta tes are h ereby invested 

wifh jii^^irtmn t,^ prevent anr^ rg?*^rftin violations of t^hisartj and it shall be 
the d uty of the several d ittrirt attomtyrs of the TTnittd Statp^, jn their 
respectivejii stricts, under the direct ion of the At tomey-Genera jLto institute 
pny^eBIn^jn eg uity to pre vent and restrajn^ guch viola tioi^r~Such pro- 
ceedings may be by way of petition setting forth Uie case and praying that 
such violation shall be enjoined or otherwise prohibited. When the parties 


Section one ded^ pffi ^^^'^^ t^Mpry r^Qntrart^ combination in the 
form of trust or otherwise, or conspiracy, in restraint of interstate 
or foreign conmierceT^d provides a penalty. Section two is 
directed against monopolizing, or attempting to monopolize, 
any part of the trade or commerce among the several states, or 
with foreign nations; andT>rovides a penalty. Section three 
declares illegal every contract, combination in the form of trust 
or otherwise, or conspffa;C5r7tIl restraint of trade or commert:r* 
in any Territory of the tTmteir States or in the District of Colum- 
bia, and likewise any such contract, etc., in restraint of trade or 
commerce between any two territ6ries, or between any territory 

oomplained of shall have been duly notified of such petition the court shall 
proceed, as soon as may be, to the hearing and detemination of the case; and 
pending such petition and before final decree, the court may at any time 
make such temporary restraining order or prohibition as shall be deemed 
just in the premises. 

Sec. 5. Whenever it shall appear to the court before which any proceeding 
imder section four of this act may be pending, that the ends of justice require 
that other parties should be brought before the court, the court may cause 
them to be summoned, whether they reside in the district in which the court 
is held or not; and smbpoenas to that end may be served in any district by 
the marshal thereof. 

Sec 6. Ap^ property owned under any contract or by any combination, 
or p ursuant to any conspy acv (and being the subject thereof) mentioned in 
section one of this act, a nd being in the course t)f transportation fro m one 
Stat^ to another, or to a foreign coimtry^ shall be forfeited to the U nited 
Stetea^ anfl may \y^ . seized and condemned by like proceedings as those pro- 
^At^tA \}y |nw f/M- tho f/^rfpiHirp^ seizure, and condemnation of property 
imported into the United States contrary to law. 

Sec 7. Any person who shall be inj ured in his business or pr oper ty by a ny 
other pe rson or corporation by reason of anything forbidden or decla red to 
be m ilawful by th i s act, m ay sue therefor in a ny circuit cour t of the United 
S tates jn the district in which the defendant resides or is found, without 
respect to the amount in controversy, an d shall recover three fold the da m- 
age s by him su stained, and the costs of suit, including a reasonable attorney's 

Sec 8. That the word "person," or "persons,** wherever used in this act 
shall be deemed to include corporations and associations existing under or 
authorized by the laws of either of the United States, the laws of any of the 
Territories, the laws of any State, or the laws of any foreign country. 

Approved, July 2, 1890. 

26 Statutes ^t Large, pp. 209-210. 




and the District of Columbia, or between either of these juris- 
dictions and any stat eor any jo r^pTngflon. The same penalty 
as in sections one and two is provide dT^ection four invests 
the circuit courts of the United States with jurisdiction to en- 
force the law, and provides that the federaJLgQvemment may 
institute proceedings in equity to prevent and restrain any vio- 
lations thereof. Section five authorizes the courts to summon 
before them parties other than the defendants^lf suSi seems to 
be necessary to effect justice. Section six authorizes (he seizure 
and condemnation of property owned under any contract or by 
any combination, etc., prohibited in section one, and 'being 
transported in interstate or foreign commerce. Section seven 
confers upon per5Cn?iBjTBi|d by the violation of the law the right 
to sue the offending party flw: treble damages and the costs of 
the suit. Section eight provuhsthat the word per^n as used 
in the act shall be deemed to inckhk corporations and associa- 
tions, no matter where incorporated. 

For nearly a quarter of a century after'^^SQo the Sherman Act 
remained on the statute books unamended, xjot until 1914 did 
Congress again give the subject of trust legislatfen the consider- 
ation that its importance demanded, and proceed w^xemedy the 
defects disclosed by experience and judicial interpretathsm. Such 
legislation dealing with trusts as was enacted in the meiintime 
was mainly directed toward supplementing the Shennan Act, in 
minor particulars. ^^ 

/ The first addition to the Sherman Act came in 1894 as a part\ 
of the Wilson tariff bill, which became law on August 27, 
without receiving President Cleveland's signatiu'e. Section 73 of 
this law provided in substance that every combination, con^jir- 
ac^ trugt, agreement, or con tra9t was illegal, w he n made Ay o r 
betwe en two or r nnr^ pprsnng ^r mrpprgy^^'o ns, either of wh om 
waS-Cngaged in importing any article into the United State s, and 
when intended to operate in restraint of lawful trade, or free com- 
petition in lawful trade, or to increase the market price in the 
United States of any article imported into the United States, or 
of any manufacture into which such imported article entered.' 

» 28 Statutes at Large, p. 570. Sections 74, 75, 76, and 77 of the W93on 



Provision was made for a penalty (fine, or fine and imprisonment) 
and for the seiziire and condemnation of the property imported 
into the United States contrary to law. 

Between 1804 and iqo.^ no furthe r anti-trust legislation was 
enacted by the national govem ipent. The decision of the Su- 
preme Court in theXnight ca^ ^ in January, 1895, greatly limit- 
ing, as it then seem ed, the ^ ectiveness of tfie Sherman Act, 
might well have led to furtherTegiStation. But this decision not 
only limited the effectiveness of the Sherman Act, but seemed to 
call into question the very power of the federal government to 
deal effectively with trusts. Confronted with this decision 
President Cleveland, who viewed the organization of trusts with 
grave concern, turned to the states as best able to provide the 
necessary relief.^ He might, to be sure, have reconmiended a 
constitutional amendment increasing the powers of the federal 
government, yet this suggestion would not have been acceptable 
to his party. Indeed it is not improbable that many members of 
his party actually welcomed the decision in the Knight case, since 
it seemed to bolster up the doctrine of state rights, — a doctrine 
dearer then than now to good Democrats. No matter how deeply 
concerned they might be over the establishment of trusts — the 
problem was by no means as serious at that time as it became 
shortly thereafter — one could hardly expect the members of the 
Democratic party in the middle nineties to support a constitu- 
tional amendment that would give to the federal government the 
power which, by the decision in the Knight case, it apparently 

In 1897 the Republican party again returned to power. The 
platform of this party in 1896 had made no reference to trusts 
except a statement to the effect that the true American policy of 
protection is "equally opposed to foreign control and domestic 
monopoly; " * and one could thus perhaps hardly have looked for 

tariff act were substantially identical with sections 4, 5, 6, and 7, respec- 
tively, of the Shennan Act of i8qo. 
» See p. 388. 

* See Richardson, Messages and Papers of the Presidents, pp. 744-745. 

• McKee, op. dt., p. 30c. 



y any trust legislation from this party at that time. As a matter 
of fact the attention of the Republican party during President 
McKinley's first term was mainly directed toward tariff legisla- 
tion, the war with Spain, and the currency situation. 

Not until the closing years of the nineteenth century, how- 
ever, did the trust problem reach a really acute stage. The or- 
ganization of numerous trusts to cover fields formerly quite com- 
petitive created an entirely new situation. In the face of this 
situation President McKinley in December, 1899, in his annual 
message to Congress, took up the subject of trusts. He said in 
part: "Combinations of capital organized into trusts to control 
the conditions of trade among our citizens, to stifle competition, 
limit production, and determine the prices of products used and 
consimied by the people, are justly provoking public discussion, 
and should early claim the attention of Congress. ... It 
is imiversally conceded that combinations which engross or con- 
trol the market of any particular kind of merchandise or conmiod- 
ity necessary to the general conununity, by suppressing natural 
and ordinary competition, whereby prices are unduly enhanced 
to the general consumer, are obnoxious not only to the conmion 
law but also to the public welfare. . . . Whatever power 
the Congress possesses over this most important subject should 
be promptly ascertained and asserted." ^ 

Early in 1900, also, the Industrial Commission, which had 
been appointed in 1898 to investigate trusts and monopolies, 
inter alia, made its preliminary report, recommending more de- 
tailed supervision over industrial corporations engaged in inter- 
state operations. The testimony before this conunission and the 
publication of its report focussed popular attention upon this 
subject. The state of the public mind at this time is indicated in 
the fact that the Republican party, which had hardly referred to 
trusts in its platform in 1896, inserted in its platform in 1900 
this clause: 

"We recognize the necessity and propriety of the honest coop- 
eration of capital to meet new business conditions, and especially 
to extend our rapidly increasing foreign trade; but we condemn 

* Cong. Record, December 5, iSqq, p. 25. 


all conspiracies and combinations intended to restrict business, 
to create monopolies, to limit production, or to control prices, 
and favor such legislation as will effectively restrain and prevent 
all such abuses, protect and promote competition, and seciwe the 
rights of producers, laborers, and all who are engaged in industry 
and commerce." ^ 

Much more vigorous denunciation of trusts was made in the 
platform of the Democratic party, as is shown by the following 

"Private monopolies are indefensible and intolerable. They 
destroy competition, control the price of all material and of the 
finished product, thus robbing both producer and consimier. 
They lessen the employment of labor and arbitrarily fix the terms 
and conditions thereof, and deprive individual energy and small 
capital of their opportunity for betterment. They are the most 
efBdent means yet devised for appropriating the fruits of indus- 
try to the benefit of the few at the expense of the many, and un- 
less their insatiate greed is checked, all wealth will be aggregated 
in a few hands and the republic destroyed. 

" We pledge the Democratic party to an unceasing warfare in 
nation, state and city against private monopoly in every form. 

" Tariff laws should be amended by putting the products of 
trusts upon the free list, to prevent monopoly under the plea of 

" We condemn the Dingley Tariff Law as a trust-breeding 
measure, skillfully devised to give the few favors which they do 
not deserve and to place upon the many biwdens which the] 
should not bear." ^ 

To satisfy the popular demand for trust legislation, a number 
of bills were introduced in Congress in 1900. One of the prin- ^ 
dpal legislative proposals was a constitutional amendment to 
give Congress adequate power to deal with trusts and to maintain 
an open field for competition in industry. This measm-e received 
a comfortable majority in the House, but failed to secxu^e the two- 
thirds requisite for a constitutional amendment, and thus came 

> McRee, op. cit., pp. 342-343. 
* Ibid., pp. 334-336. 


to naught.^ Doubtless a partial explanation of the failure of 
this amendment is the fact that the decision of the Supreme Court 
in the Addyston Pipe case, rendered in December, 1899, had 
made it clear that thq Sherman Act was more effective, and the 
power of the national government more extensive, than had 
theretofore been supposed.^ 

The constitutional amendment having failed of passage, the 
House immediately took up consideration of a bill to amend the 
Sherman Act. This bill was quite drastic, proposing among 
other things to deny the privilege of interstate transportation to 
manufacturing concerns organized for the purp)ose of monopo- 
lizing the manufacture or sale of articles of commerce, or of in- 
creasing or decreasing their price with the intent of preventing 
competition in their manufacture or sale.^ In the opinion of the 
committee that reported out the bill the measure fully exhausted 
the power of Congress to control combinations and trusts by 
penal legislation. The bill was debated in the House during only 
one day, and after being amended so as to exclude labor organ- 
izations from its prohibitions was passed by the House by a vote 
of 274-1.'* The sole dissenting vote was cast by Mr. James R. 
Mann, later the Republican leader of the House of Represent- 
atives. The Senate received the bill on June 4, referred it to the 
appropriate committee, and three days later adjourned sine die. 
4 i I n 1903 two laws dealing with tr^g^g Mrtw-n pnrmr^ g The first 
\)wa s an act to exiydite the^ earing and detenrnnati^i^ cases 
ari^fri^ under the anti-trust act and the act to regulate com- 
merce.^ u ^ '^ 

* Cong. Record, June i, 1900, p. 6426; and H^ose Report no. 1501, 56th 
Cong., I St Sess. 

*See p. 395. 

' House Report no. 1506, 56th Cong., ist Sess. 

* Cong. Record, June 2, 1900, p. 6502. 

* A proviso in the Legislative, Executive, and Judicial Appropriation Act 
of February 25, 1903, granted immunity to persons testifying in suits brought 
imder the an ti- trust or interstate commerce acts. 32 Statutes at Large, 
part I, p. 904. Because of the '* immunity bath" dedsbn (see p. 485) this 
immunity was limited in 1906 to natural persons only. 34 Statutes at 
Large, part I, p. 798. 

•32 Statutes at Large, part I, p. 823. 


The p igposeo f this bill was to r educe thf H^lay nf ffip rryirf^t 

in settli ng important C ^^^ ^riift^' "g unHpr th f anti-tmgf anH inf#>r- 

state ^mmerce _a cts> and to that end it provided in substance 
that the circuit courts of the United States must give precedence 
to suits in equity arising under these acts, when the United 
States was a complainant, and when the Attorney General 
certified that the suits were of general public importance; and 
it further provided that appeals must be taken direct to the 
Supreme Coiu't, and within sixty days from the entry of the 
decree of the lower court. 

The second act establishe d an agency to secure greato fub- 
l idty oTthe affairs of indu ^ft! rnrpnrflfj^ns^ ^The organiza- 
tion -of-inimerous trusts concerning which the public knew littjle 
had naturally created a popular demand for publicity. Presi- 
dent Roosevelt in his first annual message to Congress had said 
"the first essential in determining how to deal with the great 
industrial combinations is knowledge of the facts — ^publicity." ^ 
In his second annual message he had repeated this recommenda- 
tion, saying that "publicity can do no harm to the honest cor- 
poration; and we need not be overtender about sparing the dis- 
honest corporation." ^ Congress yielded to his wishes in this 
matter (his wishes were those of the country), and in February, 
1903, established, in the newly created Department of Commerce 
and Labor, a Bureau of Corporations, which, under the direction 
of the Secretary of Commerce and Labor, was to investigate the 
affairs of industrial corporations engaged in interstate or for- 
eign conmierce, the President of the United State to determine 
what part of the information thus obtained should be made 
public' At the head of the Bureau there was to be a Com- 
missioner of Corporations, appointed by the President, with a 
salary of $5,000. He was empowered to compel the attendance 
and testimony of witnesses, and the production of dociunentary 
By the passage in 1903 of the act creating the Bureau of Cor- 

* Cong. Record, December 3, 1901, p. 83. 
'Ibid., December 2, 1902, p. 7. 

* 32 Statutes at Large, part I, pp. 827-828. 


porations, the Expedition Act, and the Elkins Act dealing with 
raihroad rebates, the Republican party during President Roose- 
velt's first term made distinct progress in anti-trust legislation. 
Biit dining President Roosevelt's second term, though he regu- 
larly referred to trusts in his messages to Congress, nothing what- 
ever was accomplished.^ Mention should be made, however, of 
one of his main recommendations. In his message of 1907 Presi- 
dent Roosevelt had suggested that agreements among, or com- 
binations of, corporations be submitted to a government body 
for its approval. In a special message presented to Congress on 
March 25, 1908, he took up this matter in more detail. He 
pointed out that in the modem industrial world combinations 
among business men and laboring men were absolutely necessary, 
and they were coming more and more to be necessary among 
farmers. The Sherman Anti-trust Law, though only partially 
effective against vicious combinations, had been construed so 
as to prohibit every combination for the transaction of modern 
business. He therefore recommended that some governmental 
authority, presumably the Commissioner of Corporations, be 
authorized to pass on the vaUdity of contracts filed with it, and 
if within a definite time (say sixty days) the Commissioner had 
not prohibited such contract, it woiJd not be deemed to be 
illegal unless in unreasonable restraint of trade. ^ 

A bill embodying this suggestion was introduced in the Sen- 
ate on April i, 1908, only a week after the reading of the Presi- 
dent's message. On January 26, 1969, the Committee on the 
Judiciary (to which the bill had been referred) brought out the 
measiu*e, but with an adverse report. The committee in an 
unanimous report poijjted out that ^e effect of the bill woiJd be 
to confer a dispensing power, a p<Sfcvrer of granting inmiunity, on 
a mere bureau head (the Commissioner of Corporations for in- 
dustrial corporations) or on an administrative body (the Inter- 
state Commerce Commission for railroads), and in both in- 
stances without notice or hearing, — a course of procedure that 

* Except for an amendment of the immunity provisions. See footnote 
to p. 326. 
2 Cong. Record, March 25, 1908, p. 3854. 


would not be tolerated in any court in the country. ^ The Senate 
thereupon accepted the recommendation of the committee that 
the bill be postponed indefinitely.^ 

This bill was the only one proposing to amend the Sherman 
Act that was reported out of committee diuing the period inter- 
vening between the enactment of the 1903 legislation and the 
close of the Roosevelt administration in March, 1909. The only 
tangible evidence given by Congress of interest in trusts was 
in the passage of several resolutions of investigation. Among 
these were a joint resolution, approved by the President on 
March 7, 1906, instructing the Interstate Commerce Conmiis- 
sion to make examinations into the subject of railroad discrimi- 
nations and monopolies in coal and oil;^ a resolution of the Sen- 
ate directing the Attorney General to furnish it with a statement 
of all suits instituted by the Department of Justice under the 
Sherman Anti-trust Act and the Interstate Commerce Law, 
and the disposition made of the suits; ^ a resolution of the Senate 
directing the Secretary of Commerce and Labor to investigate 
the causes of the high price of lumber, and to determine whether 
there was a combination or trust in the supplying thereof; *^ and 
the passage by the House of a resolution to appoint a conmiittee 
to investigate the paper industry, and to inquire whether there 
was a paper combination.* 

William Howard Taft became President on March 4, 1909. 
President Taft made frequent reference to the trust question, 
and recommended far-reaching changes in our legislation. On 
January 7, 1910, in a special message to Congress on the anti- 

' Senate Report no. 848, 60th Cong., 2nd Sess., p. 9. 

*Cong. Record, January 26, 1909, p. 1395. Subsequently the Supreme 
Court of the United States in the Standard Oil and Tobacco cases in 191 1 by 
the enunciation of its "rule of reason'' made the passage of such a bill 
unnecessary; since these dedsions, as will be pointed out later, limited 
the ^)plication of the Sherman Act to unreasonable contracts and combina* 

* Cong. Record, March 7, 1906, p. 3440. 

* Ibid., June 25, 1906, p. 9089. 

'Ibid., January 18, 1907, pp. i330-i333» ' 
*Il»d., April 21, 1908, p. 5033. 


trust and interstate commerce laws, he expressed himself as 
hostile to trusts, and to all schemes to stifle competition and 
raise prices.* His main legislative recommendation was the 
enactment of a voluntary federal incorporation law, and pro- 
vision by means of this law for the filing of reports with the De- 
partment of Commerce and Labor, and for the prevention of 
stock-watering and holding companies (except for special rea- 
sons approved by the proper federal authority). In subsequent 
messages he renewed his reconmiendation for a federal incorpora- 
tion law, and recommended further that a Federal Corporation 
Commission, of the dignity and power of the Interstate Com- 
merce Commission, be established to supervise the companies 
taking out federal charters; that the courts be empowered to 
invoke the aid of this body or the Commissioner of Corpora- 
tions in drafting dissolution decrees; and that price cutting to 
eliminate competitors, exclusive contracts, and other kindred 
devices for stifling competition and effecting monopoly be 
specifically declared illegal and criminal. 

Despite President Taf t's great interest in anti-trust legislation, 
and the obvious need of action, only minor changes in the law 
dealing with trusts were made during his administration. On 
June 25, 1910, the Act to Expedite Hearings (1903) was amended. 
The act as amended provided that if a member of the circuit 
court was necessarily absent or disqualified, the justice of the 
Supreme Court assigned to that circuit (or the other circuit 
court judges) might designate some district judge within that 
circuit to sit in the court at the hearing of the suit.^ It provided 
further that any case in which the judges were imable to agree 
on a decision or order, instead of being certified to the Supreme 
Court for review as if on appeal, should be retried before the 
court, reconstituted through the appointment by the Chief 
Justice of the Supreme Court of another circuit judge to sit 
with the court in the determination of that particular case. 

In 1913 a bill was passed to provide for publicity in taking 
^dence under the Sherman Act. Senator Nelson, who re- 

* Cong. Record, January 7, 1910, pp. 381 seq. 

* 36 Statutes at Laige, part I, p. 854. 


ported the bill, explained that a smt had been instituted by the 
Dqwutment of Justice against the Shoe Machinery Trust, and 
that the federal judge had ordered the testimony before the 
master to be taken behind closed doors, instead of before the 
general public, as was the usual procedure.^ The purpose of this 
bfll, which was recommended by the Department of Justice, was 
to insure that testimony in cases under the anti-trust law be 
taken publicly as in open court. It was passed by the Senate on 
January 13; by the House on March 2; and signed by President 
Taft on March 3.2 

The remaining legislation passed dining the Taft administra- 
tion was not particularly important. The practice of espionage 
on the business of competitors was dealt with by a clause in the 
Mann-Elkins Act of 1910, which provided that no carrier or its 
agent should disclose information concerning either the route, 
destination, or consignee of any shipment, when such informa- 
tion might be used to the detriment of the shipper, or improp- 
erly disclose his business transactions to a competitor.^ The 
soliciting of such information was likewise made illegaL An act 
passed March 4, 191 1, making an appropriation for the naval 
service for the fiscal year ending June 30, 1912, provided that 
"no part of this appropriation shall be expended for the pur- 
chase of armor or armament from any persons, firms or corpora- 
tions, that have entered into any combination, agreement, 
conspiracy or understanding, the effect, object or purpose of 
which is to deprive the Government of fair, open and unre- 
stricted competition in letting contracts for the furnishing of 
any of said armor or armament. " ^ The act making appropria- 
tion for the fiscal year ending June 30, 1913 (passed August 22, 
1912), contained a similar provision, somewhat modified in its 
phraseology, which applied not only to armor and armament, 
but also to structural steel, ship plates, and machinery.^ 

* Cong. Record, January 13, 1913, p. 1434. 

* 37 Statutes at Large, part I, p. 731. 

* 36 Statutes at Large, part I, p. 553. 

* Ibid., p. 1288. 

» 37 Statutes at Large, part I, p. 355. 


The act providing for the opening and operation of the Pan- 
aiha Canal, passed August 24^ 191 2, contained a clause for- 
bidding the use of the canal to any ship owned, chartered, 
operated, or controlled by any person or company that was 
doing business in violation of the Shennan Act of 1890, or 
sections seventy-three to seventy-seven of the Wilson TariflF 
Act of 1894, or any act amending or supplementing either of 
these.* The question of fact was to be determined by the 
courts upon the institution of suit by the shipper or the Attorney 
General against the owners or operators of the ship. In 1913 
also (by the passage of H. R. 25002) sections 73 and 76 of the 
Wilson Tariff Act of 1894 were modified slightly.* 

In addition to these bills, a number of resolutions were 
adopted. Among them were: a House resolution requesting 
the President to furnish it with information concerning a com- 
bination between the United States Steel Corporation and its 
subsidiary companies; ' a House resolution appointing a com- 
mittee (Mr. Hardwick, chairman) to investigate the American 
Sugar Refining Company;^ a House resolution appointing a 
committee (Mr. Stanley, chairman) to investigate the United 
States Steel Corporation; ^ a Senate resolution appointing a com- 
mittee (Mr. Clapp, chairman) to report desirable changes in the 
laws controlling corporations engaged in interstate commerce; • 
a House resolution to investigate the money trust (Mr. Pujo 
chairman) ; ^ and a House resolution directing the Attorney- 
General to inform it whether there was a smelter trust in the 
United States, including the American Smelting and Refining 

* 37 Statutes at Laiige, part I, p. 567. 

' See 37 Statutes at Large, part I, p. 667. 
' Cong. Record, June 16, 1910, p. 8249. 

* Ibid., May 9 191 1, p. 1147. 
*Ibid., May 16, 191 1, p. 1234. 
•Ibid., July 26, 1911, p. 3226. 
'Ibid., February 24, 191 2, p. 2419, 
' Ibid., March 12, 191 2, p. 3200. 



As the end of President Taf t*s administration drew near it be- 
came clear that no important trust legislation would be enacted. 
The Democratic party in the summer of 191 2 nominated Wood- 
row Wilson as its candidate for the presidency, and adopted a 
platform promisinjg warfare on industrial monopoly. The plat- 
form repeated the old battle cry, "a private monopoly is indefen- 
sible and intolerable," and demanded the enactment of such 
additional legislation as might be necessary to make it impos- 
sible for a private monopoly to exist in the United States.^ 
Legislation to prevent holding companies, interlocking direct- 
orates, price discrimination, and stock-watering was urged. 
Regret was expressed that the Sherman Act through judicial 
construction had lost much of its eflScacy, and legislation to 
restore its eflfectiveness was recommended. Finally, the dec- 
laration was made that articles produced by trusts should be 
placed upon the free list. 4^ 

The Republican platform affirmed the opposition of the Re- 
publican party to special privilege and monopoly; congratulated 
the party upon the passage of the Sherman Act, and its successful 
enforcement; and asserted that the party would take no back- 

> On the trust legislation of 1914 see: Congressional Record; Commercial 
and Financial Chronicle; Durand, The Trust Problem, ch. 5; Young, 
The Sherman Act and the New Anti-Trust Legislation, Journal of Political 
Economy, 23, pp. 201-220, 305-326, and 417-436; Stevens, American 
Economic Review, 4, pp. 840-855, and 5, pp. 38-54; Seager, Political Science 
Quarterly, 30, pp. 448-462; Montague, The Federal Trade Conmiission and 
the Cla)rton Act, in Stetson, Some Legal Phases of Corporate Financing, 
Reoiganization and Regulation, pp. 275-326; House Report no. 627, 63rd 
Omg., 2nd Sess.; Senate Report no. 698, 63rd Cong., 2nd Sess. 

* Campaign Text Book of Democratic Party, 191 2, pp. 2, 6. 



ward step to permit the reestahlishment of intolerable con- 
ditions.^ It advocated the enactment of supplementary legis- 
lation defining as criminal those specific acts that uniformly 
characterized attempts to restrain and monopolize trade, to the 
end that those who desired to obey the law might have a guide 
for their action, and that those who intended to violate it might 
not escape punishment. Finally, it suggested the creation of a 
federal trade commission, which would perform many of the 
functions then exercised by the courts. 

More vigorous in tone was the platform of the newly created 
Progressive party. The trust plank of this platform, represent- 
ing the views of the leader of the party, urged the creation of a 
federal administrative commission to exercise somewhat the 
same degree of control over trusts that the Interstate Conmierce 
Conmiission exercised over interstate railways.^ Tl 

ftinn^ it Hih;'^^^ ^PPilfPrit ^^^^ TVffi |^OOSevelt*S Utt< 

to regAat^ trusts — whenever competition could not be restoi 
and to fix the pnces ot ttie articles produced by them_, 
necessary ^ ^^-^ gposeyelt favored, i t is true, the enactment of 
a dditional legislation to prohibit certamunmu- fpHo prar^^/vK^ 
su ch as local price discnmmation and rebates, the elimim ' ' 
of which, he held, would lead to the restoration ot 
in some instances; but he differed fundamental^ 

Democr^tir flnn KppnKliVan r^inHi'rJal^ jp prnpnsii^fr fn r< 

nize sotne trusts as a natural evolution instead of as a fraud on" 

In the election campaign of the fall of 191 2 the trust question 
played an important part. Probably the tariff and the trusts 
received greater attention than any other issues. But we may 
not conclude that the stand of the respective candidates on 
these issues determined the outcome of the campaign. What- 
ever the issues President Taft was certain to be defeated. 

* Republican Campaign Text Book, 191 2, pp. 272-273. 

• The platform may be found in Roosevelt. Progressive Principles, edited 
by E. H. Youngman, pp. 314-330. See especially p. 318. 

*See Outlook, 99, p. 655 (November 18, 191 1); and 102, pp. 105-106 
(September 21, 191 2). 


His party had failed to keep its promise to revise the tariflp 
downward, and the acquiescence of the President in this failure 
turned the people against him. Already in 1910 the capture of 
the House by the Democrats attested the failure of his admin- 
istration. When there was added to this state of aflPairs the 
action of the Old Guard in defeating the will of the Republicans 
(as expressed in numerous primaries), by the nomination of 
Mr. Taft as their candidate, his defeat was made certain. 
Theodore Roosevelt, who by the action of the people in the 
primaries was entitled to the Republican nomination, at once 
organized the Progressive party, — a party which developed a 
considerable strength because of the popularity of its leader, the 
program of social justice for which it stood, and no doubt 
because of a feeling that Mr. Roosevelt had been the victim of a 
fraud. But the result of the election was never in doubt. 
Woodrow Wilson conducted a dignified campaign, in which 
personalities were not indulged in, confined himself largely to a 
few issues in which the preceding administration had made a 
signal failure, and received an enormous majority of the elec- 
toral votes. ^ 
V" During the course of the campaign Mr. Wilson had promised , 
fiirth er anti-trust legislatio n. As he had said, " I take my stand 
absolutely, where every progressive ought to take his stand, on 
the proposition that private monopoly is indefensible and intol- 
erable." ^ The enactment of anti-trust legislation, however, was 
to wait upon the completion of two other programs, — tariff 
reform and banking reform. The Congress which was called in 
special session on April 7, 1913, passed the Simmons-Underwood 
tarifiF bill on October 3, 1913 — ^a measure which, in view of the 
Democratic doctrine that the trusts have been promoted by the 
tarifiF, may be regarded as a partial remedy for the trusts — and 
passed the Federal Reserve Act on December 23, 19 13. The 
decks were now cleared for trust measures. 

The message of the President on trust legislation was delivered 
to Congress in person oh January 20, 1914.^ His trust pro- 

* Wilson, New Freedom, p. 172. 

• Cong. Record, January 20, 1914, pp. 1962-64. 


gram was founded on the conviction that "private monopoly 
is indefensible and intolerable," — a proposition which he held all 
were agreed upon. He said that we propose to be the spokesmen 
of the best informed men of the business world, who condemn the 
methods and processes and consequences of monopoly as we 
condemn them. His program was to be a comprehensive one, 
but not radical or unacceptable. There was to be "nothing 
essential disturbed, nothing torn up by the roots, no parts rent 
asimder which can be left in wholesome combination." The 
object, he said, was not to unsettie business, but to pass laws to 
be the bulwarks and safeguards of industry against the forces 
that had disturbed it. The items in this program wge : first, 
la ws that would effectually prevent such interlockings of the 
personnel of the directorates of greatcorporations as resulted in^ 
making those i^a aff ectfid_iSL compete in fact partners ^anfll 
ma sters o f some whole field of business. Such a prohibition, he 
said, would bring new men, new energies, a new spirit of initia- 
tive, and new blood into the management of our great business 
enterprises; it would open the field of industrial development and 
origination to scores of men who had been obliged to serve when 
their abiUties entitled them to direct. Second , a lawj hat. 
' "'^ iM r II I HI I 1 T '^i^fQip ^ommerri^ Commission the 
pn^^r fn RiippY|p tend and regulate the financial ^ pfiratmn*^ j^y 
whic h the r ailroads were henceforth to b e supplied with the 



mnnpy thp y nee^P( \ for thfir p^^p^^ d^'^^^^p^pn t ^"l^h n law 

was to be one step toward the necessary separation of the busi- 
ness of production from the business of transportation. TWrd, 
an <>vpiiVi> ^^pp^lativf ^pfini^^^i"" <^f th^ ^hcy and meaning^oLilifi 
pyis finy an tj- trust law, a prohibition item by item of the prac- 
tices of monopoly which experience had disclose d, in order that 

le condemnation of 

^ la wJrom an inability to find out just what the lawjBSfasr» Fourth, 
J the creation of aiTlniersiatenTade^commission. ^ThisBody"^ 

would not be empowered to make terms with monopoly or to 
assume control of business; rather it was to serve as an instru- 
ment of information and publicity, and to assist in the dissolu- 
tion of concerns which had combined to a degree inconsistent 



with the public interest and the freedom of trade, jjfth , the 
pgtftb]i<^)^mpnf f\i t he principle that penalties and punishments 
shoiil ^ fall not upon business itselt, to its conf usion and i 
tio^but upon tne maiviauais wno u 



\o go nlliiH& whidr 


l e instrumentalities 

condemne d^ Every act of business is done at the 
command or upon the initiative of some ascertainable person or 
group of f)ersons; and these should be held individually respon- 
sible and the punishment should fall upon them, not upon the / 
business organization of which they made illegal use. Sjxth^ the 
prohibition of holding compani^ . The President presented to " 
Congress lor its consideration the question whether we should 
reqxiire individuals owning stock in several companies which 
ought to be independent, but which on accoimt of common stock 
ownership were brought imder a common control, to decide in 
which of them they would elect the right to vote. Sevent h. 
i-abVf fy[ the individuals who had been injiu-ed by the many dis- 

In dgji^p flT^d pirtpyjy^jy^^Hnpy frir/-^ pf ^^Tnl^inati^i j. Private 

individuals who claim to have been injured by these processes 
should be given the right, he held, to foimd their suits for redress 
upon the facts and judgments proved and entered in suits by the 
government when the government had upon its initiative sued 
the combinations complained of and won its suit. It was not 
fair, he said, that the private Utigant should be obliged to estab- 
lish again the facts which the government had already proved. 
Immediately upon the conclusion of the President's address 
the House voted to refer that part of the message which related 
to a Trade Commission and to the regulation of railway securities 
to the Committee on Interstate and Foreign Commerce, and the 
balance to the Committee on the Judiciary.^ Two days later it 
was publicly annoimced that the trust legislation would be em- 
bodied in five separate bills: (i) a Trade Commission bill; (2) an 
Interlocking Directorates bill; (3) a Definitions bill; (4) a Trades 
Relations bill, dealing with unfair competition; and (5) a Rail- 
road Securities bill.* Shortly after these bills had been made 

' Coog. Record, January 2o» 1914, p. 1980. 
«Chron., 98, p. 273 (January 24, 1914)- 



public, hearings upon them b^an. Later the five bills were 
y consolidated into three: (i) the Trade Commission bill; (2) the 

, Clayton bill, which included the Interlocking Directorates bill 
and the Trade Relations bill (the Definitions bill was dropped) ; 
and (3) the Railroad Seauities bill. This third measure, which 
was to give the Interstate Conmierce Commission authority 
to regulate the issues of securities by common carriers and to 
deal with interiocking directorates among common carriers, was 
designed to prevent the occurrence in the futiu-e of such scandals 
as the Rock Island and New Haven episodes. The bill was 
f)assed by the House on June 5 by a vote of 325-12,^ but early in 
September the announcement was made that, in view of the 
disturbed conditions created by the Eiu-opean War, the Presi- 
dent had consented to the postponement of the measure. Thus 
was another illustration given of the baneful effect of war on 
domestic policies. 
Before analyzing in some detail the two trust bills that were 

. enacted into law, we may outline briefly their legislative history. 

\ The first — the Trade Commission bill (H. R. 1 2120)— was intro- 
duced in the House on January 22 by Representative Clayton, 
and referred by the House to the Committee on Interstate Com- 
merce.^ At the same time this bill was introduced in the Senate 
as S. 4160. During the course of the committee hearings it 
became apparent that the bill did not fully carry out the ideas of 
the President, and therefore Chairman Adamson on February 16 
appointed a sub-committee, of which Representative Covington 
of Maryland was made chairman, to draft a new bill.' On 
March 14 Mr. Covington introduced in the House a new bill 
(H. R. 1463 1 ), which represented the imanimous views of the 
sub-committee.^ This bill was referred to the Conmiittee on 
Interstate Commerce. One month later (April 13) a new bill 
(H. R. 15613), a revised draft of the former bill, was introduced 
by Representative Covington, and referred by the House to the 

* Cong. Record, June 5, 1914, p. 9912. 

* Ibid., January 22, 1914, pp. 2142, 2150-1. 
•Chron., 98, p. 567 (February 21, 1914). 

* Cong. Record, March 14, 1914, p. 4886. 


Committee on Interstate Commerce.^ The next day this com- 
mittee reported the bill to the House without amendment, 
accompanied by a report (no. 533).^ The committee in its report 
stated that the bill provided for a trade commission in accord- 
ance with the views of the President as expressed in his message 
to Congress. The bill was framed on the principle of preserving 
competitive conditions in interstate commerce; the commission 
had not been given power to make terms with monopoly, to regu- 
late prices or production, to declare any particular corporation 
or agreement innocuous, or to issue orders. The report was con- 
curred in by all the Democratic members of the committee except 
two who did not believe the bill was sufficiently drastic, and by 
all the Republican members of the committee; in fact the prep- 
aration of the bill and its coiu*se through Congress were marked 
by a comparative absence of political considerations, the Repub- 
licans cooperating with the Democrats to effect its passage. In 
part this fortunate state of affairs was due to the widespread de- 
mand for the establishment of a commission — the poll conducted 
by the Chamber of Commerce of the United States was eloquent 
testimony as to the strength of this demand — and in part it was 
due to the skill and courtesy of Representative Covington, who 
carefully avoided stirring up antagonisms or factional differences. 
On May 19 debate on the bill began in the House. Amended in 
only one particular (and that a minor one), the bill passed the 
House on June 5, 1914.' The vote on the measure was not 
recorded, but that the opposition to its passage was slight is 
attested by the fact that a motion to recommit the bill, offered by 
Representative Murdock of Kansas (a Progressive), was de- 
feated by a vote of 151 to 19.^ (Not all of the nineteen, however, 
were to be regarded as hostile to the measure, for Mr. Murdock 
himself stated that he was not opposed to the passage of the bill.) 
The House bill was referred by the Senate to the Committee on 
Interstate Commerce; and on June 13 was reported from the 

* Cong. Record, April 13, 1914, p. 6648. 

* Ibid., April 14, 1914, p. 6714. 

* Ibid., June 5, 1914, p. 9910. 


committee. The action of the committee consisted in striking 
out all of the House bill except the enacting clause, and substitut- 
ing therefor the provisions of the Senate bill (S. 4160), with the 
addition of several sections dealing with imfair competition and 
foreign trade practices. On June 25 the Senate took up the con- 
sideration of this bill. Debate upon it occupied a large share of 
the Senate's attention during the month that followed, the 
principal bone of contention being the unfair competition provi- 
sions which had been added to the bill by the Senate Committee. 
On July 22 the Democratic members of the Senate at a caucus 
agreed that the bill should be kept constantly before the Senate 
imtil its final disposition.^ Finally on August 4 a unanimous 
consent agreement was entered into that the Senate would vote 
on the bill not later than August 5.^ On that day the bill, 
amended in many particulars, passed the Senate by a vote of 
53 to 16, 27 not voting.^ Only two Democrats voted against the 
bill (though quite a number were absent) and twelve Republi- 
cans voted for it. 

The House disagreeing to the amendments of the Senate, a 
conference became necessary. The conference committee 
labored over the bill for nearly a month, endeavoring to agree 
upon a measure that would include the fundamental provisions 
of both bills. On September 4 the result of their labors was 
presented to the Senate and to the House. The conference report 
was agreed to in the Senate on September 8 by a vote of 43-5,* 
the main features of the debate being the exceeding difficulty 
experienced in maintaining a quorum. The conference report 
was taken up in the House on the loth. Representative Mann of 
Illinois, the leader of the opposition, expressed the prevailing 
sentiment when he said that the discussion on the bill had been 
devoid of partisan politics from the start, and that it was a good 
bill.^ The House on the loth agreed to the conference re- 

* Chron., 99, p. 238 (July 25, 1914). 

' Cong. Record, August 4, 1914, p. 13235. 

* Ibid., August 5, 1914, p. 13319. 

* Ibid., September 8, 1914, p. 14802. 

' Ibid., September 10, 1914, p. 14940. 


port.^ Nothing now remained but the signature of the 
President; and this was affixed on September 26, 1914. 

The second of the trust measures — the Clayton bill (H. R. 
15657) — ^was introduced in the House on April 14.^ Of the 
three tentative bills before the Committee on the Judiciary one 
(the Definitions bill) had been dropped, and the other two had 
been consolidated. A Definitions bill had been urged by Presi- 
dent Wilson in his message to Congress, but the objection was 
raised that a specific enumeration of oflFenses under the act might 
limit the scope of the anti-trust acts. The Attorney General, for / 
example, expressed the opinion that a legislative definition of 
offenses might weaken the act. Moreover, it was certain that it 
would be years before the various offenses defined in the bill 
would receive judicial interpretation. Apparently the President 
became convinced of the force of these objections; and as a re- 
sult the Definitions bill was dropped. The remaining bills (the 
Interlocking Directorates bill and the Trade Relations bill),^ 
with some new matter, were consolidated into one, — the Clayton 
bill. As one commentator has put it, two separate measures 
were better targets for criticism than a single bill, and at the 
same time they did not afford as good a rallying-ground for those 
who were willing to support the administration.^ The Clayton 
bill was referred by the House to the Committee on the Judi- 
ciary. On May 6 the bill was reported from the committee with 
an amendment, accompanied by a report (no. 627).* Debate on 
the bill began on May 22. It occupied the attention of the House 
until Jime 5, when it was passed with its amendments by a vote 
of 277 to 54.* Only one Democrat voted against it, while forty- 
three Republicans and sixteen Progressives voted for it.® In 
spite of the charge made against the bill that it was conceived in 
a spirit of partisanship in marked contrast to the Trade Commis- 

* Cong. Record, September 10, 1914, p. 14933. 

* Ibid., April 14, 1914, p. 6714. 

* Young, Journal of Political Economy, 23, p. 320. 

* Cong. Record, May 6, 1914, p. 8201. 

* Ibid., June 5, 1914, p. 991 1. 

* Chron., 98, p. 1814 (June 13, 1914)- 


sion bill, it received the support of a large number of Republicans 
and Progressives. 

The Clayton bill was presented to the Senate, and on June 6 
referred to the Committee on the Judiciary. ^ On the 2 2nd of July 
it was reported out with amendments and with a report (no. 698).* 
Consideration of the bill by the Senate in Committee of the 
Whole was begun on August 1 1 ; and for the next three weeks the 
Senate concentrated its attention upon it. On September 2 the 
measure, amended in many vital particulars, passed the Senate 
by a vote of '46-16.' The forty-six votes ior the measure were 
cast by thirty-eight Democrats, seven Republicans, and one 
Progressive. The sixteen votes in opposition were all cast by 

The amendments to the House bill made by the Senate were 
numerous and far-reaching, and a conference was therefore 
necessary. The report of the conference committee was pre- 
sented to the Senate on September 23, read on September 26, 
and taken up for debate on September 28. Vigorous objection to 
the report was made, particularly by Senator Reed of Missouri, 
who held that the teeth had been removed from the bill, his 
principal objection being the failure of the conferees to retain the 
criminal penalties provided for by the House. In order to effect 
the restoration of the criminal penalties, he made a motion on 
October 5 to recommit the bill to conference. This was defeated 
by a vote of 35-25.^ The Senate thereupon by a vote of 35-24 
agreed to the conference report.^ On October 7 the report was 
taken up in the House, and the next day the report was agreed 
to by a vote of 245-52.® The signature of the President was 
affixed on October 15, 1914, thus bringing to a conclusion the 
anti-trust legislation of the year. . 


In describing the provisions of the Trade Commission Act 
we shall take up, first, the organization of the Commission; 

* Cong. Record, June 6, 1914, p. 9929. * Ibid., October 5, 1914, p. 161 70. 
•Ibid., July 22, 1914, p. 12468. 'Ibid. 

• Ibid., September 2, 1914, p. 14610. • Ibid., October 8, 1914; p. 16344. 


second, its principal powers and duties; and thirds some miscel- 
laneous provisions. 

Organization of (he Commission 

TtiA o^f pT/\^'^g 4 for the creation of a Federal Trade Commis- 
fd on of five y embers to be appointed by th e P resident, with the 
a dvice and consent of the SenatCi I' he salary of each member^ 
w as fixed at a vear* and the term of office at seven yearg; 
except for the first appointees, who were to serve for tffee, 
four, five, six, and seven years, and except for appointments to 
fill vacancies, in which case the imexpired term was to be filled 
out Not more than three of the five commissioners might be • 
of the same political party. No commissioner might engage 
in any other business, vocation, or employment. The commis- 
sioners might be removed by the President for inefficiency, 
neglect of duty, or malfeasance in office. 

Upon the organization of the Commission and the election of 
its chairman, the Bureau of Corporations and the offices of the 
Commissioner and Deputy Commissioner of Corporations were 
to cease to exist; but the Commission was to continue all the 
pending investigations and proceedings of the Bureau, to retain 
all the clerks and employees of the Bureau at their former grades 
and salaries, and ta take possession of all the records, papers, 
and property of the Bureau, including any unexpended funds. 

The Commission was to appoint a secretary at a salary of 
$5,000 a year, and to have authority to employ and fix the com- 
p)ensation of such attorneys, special exp>erts, examiners, clerks, 
and other employees as it might from time to time find neces- 
sary, and for whom Congress might from time to time make 
appropriation. With the exception of the secretary, a clerk to 
each commissioner, the attorneys, and the special experts and 
examiners, all employees of the commission were to be a part 
of the classified civil service. 

Powers and Duties of the Commission 
The principal powers of the Commission may be classified 


under two heads: I. Investigati^ : II. Thp p^yf n*^i"" ^^ unfair 
methods of com petition in commerce.^ _ 

[. The powers of investigation possessed by the Conmiission 
are primarily th ose that relate : (A), to all corporations^e ngaged 
in commerce, other than banks and common ca rriers ; and (B), 
to all corpontiions guilty or alleged , to be-ffiuJi^ of violating the 
anH- tgist |aw<; . The first set of powers obviously relates to a 
larger nimiber of corporations; but the second setlSates to a 
greater variety, for it includes not only industrial corporations, 
but also banks and common carriers, which as to their ordinary 
operations are \mder the control of other government bodies. 

A. The powers of investigation that relate to those corpora- 
tions engaged in commerce which are within the especial juris- 
diction of the Commission (industrial corporations) are: 

(i) "To gather and compile information concerning, and to 
investigate from time to time the organization, business, con- 
duct, practices, and management of any corporation engaged in 
conmierce, excepting banks and common carriers subject to 
the Act to regulate commerce, and its relation to other corpora- 
tions and to individuals, associations, and partnerships.'' ^ 
This power is only a little broader than that possessed by the 
Bureau of Corporations. The main differences are that the 
Bureau of Corporations in its investigations was subject to the 
direction and control of the Secretary of Commerce and Labor, 
whereas the Federal Trade Commission is not; that the Bureau 
was not specifically authorized to investigate "business" 
and "practices,** as well as organization, conduct, and manage- 
ment; and that the authority of the Bureau included banks, while 
that of the Conmiission does not. 

(2) To require, by general or special orders, the corporations 
subject to its especial control to file with it "in such form as the 

^ The term commerce as defined in the act means "conunerce among the 
several States or with foreign nations, or in any Territory of the United 
States or in the District of Columbia, or between any such Territory and 
another, or between any such Territory and any State or foreign nation, 
or between the District of Columbia and any State or Territory or foreign 

* Section six (a). 


commission may prescribe" annual or special reports, or answers 
in writing to specific questions, furnishing to the Commission 
such information as it may require regarding their organization, 
business, conduct, practices, management, and their relation 
to other corporations, partnerships, and individuals. These 
reports and answers are to be made under oath, or otherwise, 
as the Conmiission may prescribe, and to be filed within such 
reasonable period as the Commission may set.^ Any corpora- 
tion which fails to file the annual or special report within the 
time fixed by the Commission is subject to a penalty of $100 per 
day, to be recovered by the Department of Justice, and paid 
into the Treasury of the United States.^ Moreover, any person 
who willfully makes, or causes to be made, any false entry or 
statement of fact in any report made to the Commission, or who 
willfully makes any false entry in any accoimt, record, or memo- 
randum kept by any corporation subject to this act, or who will- 
fully neglects to make full and correct entries in such accounts, 
etc., of all transactions pertaining to the business of the corpora- 
tion, or who willfully removes out of the jurisdiction of the 
United States, or willfully alters or by any means falsifies, any 
documentary evidence of such corporation, is subject to a fine 
of not less than $1,000 nor more than $5,000, or to imprison- 
ment for a term not to exceed three years, or to both such fine 
and imprisonment.* The House and the Senate bills had pro- 
vided that the Commission might prescribe "as near as may be a 
uniform system of annual reports." This was modified to read 
that these reports, including the special reports, should be made 
"in such form as the commission may prescribe." In giving 
the Commission power to call for annual and special reports the 
Trade Commission Act represents a distinct advance over the 
act creating the Bureau of Corporations. In the latter act there 
was no compulsory power provided whereby the Biu-eau could 
obtain regular reports, even assuming, what is imlikely, that the 

^Section six (b). 
i, * Sectkni ten. The penalty does not lie tintil thirty days after the date 
set by the Commission. 
'Section ten. 


general powers of investigation conferred on the Bureau included 
the power to call for reports. But in the Trade Commission 
Act the power is specifically given, and a penalty is provided. 

(3) The Commission has power to classify corporations from 
time to time, and to make rules and regulations for the purpose 
of carrying out the provisions of the act.^ It is not dear just 
what the significance of this clause is. Mr. Stevens holds that 
the effect of this provision combined with the power to call for 
reports is apparently to give the Commission the power in its- 
discretion to make a classification of corporations, and then, if 
the Commission deems it fitting, to prescribe a imiform system 
of accounting for the reports of all members of each class.^ 

• However, neither the Commission nor the coiuls have as yet 
passed upon the meaning of this subsection. 

B. We come now to those powers of investigation that relate 
to corporations guilty or aUeged to be guilty of violating the 
anti-trust laws. To some extent the powers to be now considered 
are broader than those of mere investigation, but they may be 
included here, since they embrace in every instance thorough 
investigation. The Commission has the following powers: 

(4) "Upon the direction of the President or either House of 
Congress to investigate and report the facts relating to any 
alleged violations of the antitrust Acts by any corporation." • 
In the House and Senate bills the Commission was made subject 
in this matter to the direction of the Attorney General also, but 
in view of the fact that the Attorney General was the head of an 
executive department, it was concluded that the direction of the 
President would be sufficient. Accordingly this provision was 
eliminated in conference. It is expected that the effect of this 
clause will be to transfer to the Commission much of the work 
of investigation formerly carried on by the Department of Jus- 

(5) "Upon the application of the Attorney General to in- 
vestigate and make recommendations for the readjustment of 

* Section ax (g). 

* Stevens, American Exonomic Review, 4, pp. 849-850. 

* Section six (d). 


the business of any corporation alleged to be violating the anti- 
trust Acts in order that the corporation may thereafter main- 
tain its organization, management, and conduct of business in 
accordance with law." ^ It will be noticed that the Commission 
exercises this power only upon the application of the Attorney 
General, and that the Attorney General is under no compulsion 
to accept the recommendations of the Commission. Should 
there be co<^)eration between these two bodiefif— as Congress 
doubtiess intended — this provision will prove helpful.^ The 
increasing activity of the Department of Justice in recent years 
has engendered in a nimiber of concerns the desire to readjust 
their business in such a way as to avoid a government suit. 
Having proven imsuccessful in securing the establishment of a 
Commission with power to give them an "immunity bath," 
i e., to pass on the reasonableness of their agreements, these 
concerns desire an assurance that they will not be prosecuted by 
the Attorney General then in office. This assurance they can 
now obtain by a readjustment of their a£fairs in a manner ap- 
proved by the Department of Justice. It is highly desirable 
that these volimtary reorganizations be promoted, as they effect 
the desired end without the delay and exp>ense of court proceed- 
ings. And it was the opinion of Congress that the Commission 
was better constituted than the Department of Justice to sug- 
gest a satisfactory economic reorganization, leaving to the De- 
partment the acceptance of the plan as being legally satisfac- 

(6) Upon the request of the court, and as a master in chan- 
cery, to ascertain and report an appropriate form of decree 
in any suit in equity brought \mder the direction of the Attorney 
General as provijled in the anti-trust acts.' The court may adopt 
or reject the report in whole or in part, and may enter such de- 

* Sect ton six (e). 

' Down to May, 1920, the Attorney General had called upon the Commis- 
sion for recommendations only twice: once in the case of certain news print 
manufacturers, and once in the case of the California Raisin Association. 
Correspondence with Federal Trade Commission. 

* Section seven. 


cree as it judges proper. This provision, should the courts take 
advantage of it, will prove distinctly helpful. The formulation 
of a decree, particularly a dissolution decree, is an exceedingly 
difficult matter, — one calling for skill, judgment, and detailed 
technical knowledge of the industry inv81ved. The exigencies 
of the situation may require that the trust be split up into a 
nimiber of separate imits. These units must not be so laige 
as to make competition between them unlilyely; nor must they 
be so small as to sacrifice efficiency. The problem is thus pri- 
marily economic, rather than legal ,^ and tfie provision for the 
preparation of a decree by the Trade Commissijm is an indication 
that Congress recognized this to be the 4ase.^ ^Should the coiuls 
invoke the aid of the Commission, it is uijUkelv that dissolution 
decrees as ineffective as those in the oil ,and A)liacco cases will 
be again entered. It is true that the Attorn^ General invoked 
the aid of the Biu-eau of Corporations in *Ae dls^lution of the 
tobacco trust, and that the principal expe^ ofiiJthe Bureau re- 
ported that the distribution of business imd^r the plan was 
economically satisfactory.^ Yet there is consid^able difference 
between an official of the Bureau acting exti^-omcially and five 
Trade Commissioners performing a service ^)iecifically provided 
for in the law, in order that earlier farces may not be repeated. 
However, to date * the courts have not availdd^ themselves of the 
benefits of this section. ^ 

(7) "Whenever a final decree has been tnteied against any 
defendant corporation in any suit brought by tjie United States 
to prevent and restrain any violation of the dntkrust Acts, to 
make investigation, upon its own initiative, of Ate manner in 
which the decree has been or is being carried out,mnd upon the 

* Attorney General Wickersham in his Annual Repbrt for 191 1 (p. 6) 
stated that the problems involved in working out the tobacco dissolution 
plan were economic rather than legal, and admitted that neither the courts 
nor the Department of Justice were properly equipped to work out such 
problems, save in exceptional cases. ^ 

* Annual Report of the Attorney General, 191 1, p. 7. ^ 

* May, 1920. In the glucose case a bwer court requested the Commissbn 
to prepare a dissolution decree; but the case was appealed, and the Commis- 
sion did not actually prepare a decree. 


application of the Attorney General it shall be its duty to make 
such investigation. It shall transmit to the Attorney General 
a report embodying its findings and reconmiendations as a 
result of any such investigation, and the report shall be made 
public in the discretion of the commission." ^ This provision 
was taken from the House bill, except that in that bill the Com- 
mission was required to investigate on its own initiative into the 
observance of the decree, whereas in the act the Commission is 
required to investigate only upon the request of the Attorney 
General. This function is one that was formerly exercised by 
the Department of Justice, but especial legislative provision 
for its exercise by the Commission either on its own initiative 
or upon the initiative of the Department of Justice will doubtiess 
cause it to be performed more regularly and conscientiously. 

(8) "To investigate, from time to time, trade conditions in 
and with foreign countries where as3ociations, combinations, 
or practices of manufactjiu:ers, merchants, or traders, or other 
conditions, may affect the foreign trade of the United States, 
and to report to Congress thereon, with such reconmiendations 
as it deems advisable." ^ 

(9) To make public from time to time such portions of the 
information obtained by it, except trade secrets and the names 
of customers, as it shall deem expedient in the public interest; 
and to make annual and special reports to Congress, and to sub- 
mit therewith recommendations for additional legislation; and 
to provide for the publication of its reports and decisions.' 
The ability of the Commission to determine for itself what in- 
formation it shall make public, rather than have the matter 
determined by the President, gives it added prestige. It is to 
be hoped that the Commission will make public all the informa- 
tion it seciffes that bears on the trust question. The trusts 
can no longer plead the sacro-sanct character of their business; 

^ Section six (c). 

* Section six (h). Acting under the authority granted by this section 
the Commissbn undertook and has completed (1916) an investigation of 
Coopeiutkm in American Export Trade. 

* Section six (0. 


this business has reached such dimensions as to cause them to be 
imbued with a public interest. If they are not public service 
corporations, as that phrase is technically used, neither are they 
private institutions. The annual reports to Congress making 
recommendations for additional legislation will imdoubtedly 
influence the future coiu*se of trust legislation, just as the recom- 
mendations of the Interstate Commerce Commission have in- 
fluenced the trend of railway legislation. No doubt the experi- 
ence of the Interstate Commerce Commission with the railwa)rs 
made Congress siu-er of its ground in the creation of a Trade 
Commission, yet that experience afforded no complete parallel. 
The Trade Commission deals with a much larger nimiber of 
corporations, pursuing diverse businesses; and it is established 
to restore and preserve competitive conditions rather than to 
fix the charges for service performed by corporations that are 
generally recognized as patural monopoUes. Under these cir- 
cumstances it is imdoubtedly better that the country should 
proceed siu^ely, even if it seems to be proceeding slowly; for if /j 
progress is siu-e, the goal is likely to be sooner attained. ^ 

II. In addition to its powers of investigation, the Commis- 
sion has power over unfair methods of competition.^ Section five 
declares that "unfair methods of competition in commerce are 
hereby declared unlawful." ^ The Commission is then directed 
to prevent persons, partnerships, or corporations (except banks, 
and common carriers subject to the acts to regulate commerce) 
from using unfair methods of competition in commerce. The 
remaining provisions of this section, dealing largely with pro- 
cedure, may be enimierated seriatim, (i) If the Commission 
has reason to believe that any person, partnership, or corpora- 
tion (save those excepted above) has been or is using any unfair 
method of competition in commerce, and if it shall appear to 
the Commission that a proceeding by it would be in the interest 
of the public, it shall serve upon such person, firm, or corpora- 
tion a complaint stating its charges, and containing a notice of a 

^ For a definition of commerce as used in the act see p. 344. 
» On the subject of unfair competition, see the report of the Bureau of 
Corporations on Trust Laws and Unfair Competition. 


hearing to be held at least thirty days after the service of the 
complaint. (2) The party complained of shall have the right 
to appear at the time fixed and show cause why an order should 
not be entered requiring it to desist from the violation of the law 
as charged in the complaint. (3) Other parties may be allowed 
by the C(»nmission to intervene and appear in the proceedings 
by counsel or in person. (4) If upon such hearing the Conmiis- 
sion shall be of the opinion that the method of competition in 
question is prohibited by the act, it shall make a written report! 
in which it shall state its findings as to the facts, and it shall' 
order such corporation to desist from using such method of com- 
petition. (5) If the order is not obeyed, the Commission may 
apply to the circuit coiut of appeals of the United States, within 
any circuit where the method of competition in question was 
used or where such corporation carries on business, for the en- 
forcement of its order. (6) Upon the filing of the application 
and of the transcript of record, the court shall have jurisdiction 
of the proceeding, and shall have power to make an order affirm- 
ing, modifying, or setting aside the order, of the Commission. 
(7) The findings of the Conmiission as to the facts, if supported 
by testimony, shall be conclusive. (8) If either party shall apply 
to the court for leave to adduce additional evidence, and shall 
show to the satisfaction of the coiut that such additional evi- 
dence is material and that there were reasonable grounds for 
the failure to adduce such evidence in the proceeding before 
the Commission, the coiut may order such additional evidence 
to be taken before the Commission. (9) By reason of the addi- 
tional evidence, the Commission may modify its findings as 
to the facts, or make new findings, which findings, if supported 
by testimony, shall be conclusive; and the Commission shall 
file its findings and its recommendation, if any, for the modifi- 
cation or setting aside of its original order. (10) The judgment 
and decree of the court shall be final, except that an appeal 
may be taken to the Supreme Coiut upon certiorari as provided 
in section two himdred and forty of the Judicial Code. (11) 
Any party required by an order of the Commission to desist 
from using an unfair method of competition may obtain a re- 


view of this order in the aforesaid drcuit court of appeals by 
filing a written petition asking that the order of the Commission 
be set aside. (By this provision the party complained of need 
not wait for the Conunission to act; it can proceed upon its 
own accoimt to test the validity of the Commission's order.) 
(12) The Commission upon being served with a copy of this 
petition shall file in the court a transcript of the record as above 
provided. (13) Upon the filing of the transcript the coiut shall 
have the same jurisdiction of the proceeding as in the event of an 
application by the Commission for the enforcement of its order. 
(14) The jurisdiction of the drcuit coiut of appeals of the United 
States to enforce, set aside, or modify orders of the Commission 
shall be exclusive. (This is true whether the initiative in bring- 
ing the order of the Conunission into coiu-t be taken by the 
Commission or by the party complained of.) (15) The pro- 
ceedings in the circuit coiu^t of appeals shall be given precedence 
over all other cases pending therein, and shall be in every way 
expedited. (16) No order of the Commission or judgment of 
the Court to enforce the same shall in any wise relieve or absolve 
any person, partnership, or corporation from any liability under 
the anti-trust acts. 

The Senate bill had declared unlawful " unfair competition." 
The objection had been raised in the course of the debate in the 
Senate that the term was too vague; that business men would 
not know what in law was " fair " and what was "unfair." Even 
Representative Covington stated that when the proposition to 
prohibit "unfair competition" was first mooted in the House he 
believed that the phrase was too vague to be enforced.^ But 
further reflection and study convinced him as well as most of the 
other doubters that the phrase had a definite significance in the 
decisions of the courts;^ and the bijl passed the Senate in this 
form. In the conference committee there was substituted for 
"unfair competition" the words "unfair methods of competi- 
tion." This change was made upon the insistence of the House 
conferees. Senator Cimunins, who had introduced the unfair 

* Cong. Record, September 10, 1914, p. 14928. 

* On unfair competition, see Nims, Unfair Business Competition. 


competition section in the Senate, in discussing the action of the 
conference committee, said that the two terms in his judgment 
meant exactly the same thing, though he regretted the change, 
since the term "unfair competition*' was, in his opinion, better 
understood at law than the term "unfair methods of competi- 
tion." Representative Covington, chairman of the House con- 
ferees, in explaining the conference report, cited numerous cases 
to show that there was a well-defined class of declarations by 
the courts defining "unfair methods of competition," — ^many 
more than there were in 1890 to indicate the meaning of the 
words "contracts in restraint of trade," as found in the Sherman 
Act. But to meet the objection that the meaning of the law was 
uncertain it was provided that no penalties should lie against the 
initial violation of this prohibition; penalties were to operate 
onlv after the order of the Commission to desist from the use of 
any particular unfair competitive device had been affirmed by 
the courts. In order that meanwhile the use of unfair competi- 
tive methods might not prove disastrous to the complainant, 
provision was made for the expeditious determination of the 
matter by the courts. 

The Senate bill had required the Commission to act whenever 
it had reason to believe that any person or concern was resorting 
to unfair competition. The conference committee added a 
proviso that the Commission should act, " if it shall appear to the 
conmiission that a proceeding by it in respect thereof would be 
to the interest of the public." As Representative Clayton 
pointed out in explaining the conference report, this proviso was 
inserted to prevent the Commission from becoming a clearing 
house for the settlement of everyday quarrels of competitors in 
matters which were free from detriment to the public, and which 
ought to be settled through the courts. ^ To compel the Commis- 
sion to take up every instance of an "unfair method of competi- 
tion" would hamper it in effecting a speedy redress of those 
particular unfair competitive methods which tended to bring 
about monopoly, and which, were they not straightway enjoined, 
might mean ruin to the independent manufacturers. Unless 
' Con^. Record, Septonber 10, 1914, p. 14930. 


we are to have confidence in the good faith of the Commission 
in determining when the public interest is concerned, it had 
been better never to have established such a body. It is particu- 
larly important, however, that the Conunission act in good faith, 
since the initiative in preventing unfair competition under this 
act can be taken only by it; the Department of Justice can not 
institute a suit to restrain unfair methods of competition; nor 
can the Court entertain such a suit 

An important change was also made in conference in the 
nature of the court review of the Commission's orders. The 
Senate bill had provided that the Commission might bring a 
suit for the enforcement of its orders in the district court of the 
appropriate district (the party against whom the order had been 
given might do the same). In order to avoid the delay of the 
lower courts, it was provided in conference that the circuit court 
of appeals should have initial jurisdiction of cases relating to the 
orders of the Commission, and that the circuit court should 
expedite the cases in every way possible. The controversy in 
the Senate between the advocates of a "broad review" of the 
Commission's orders and a "narrow review" resulted in a victory 
for the former. The advocates of a "broad review" contended 
that the Trade Commission Act would be unconstitutional unless 
it provided for a broad review of the Conmiission's orders by the 
courts. A narrow review of the orders of the Interstate Com- 
merce Conunission had been held to be constitutional, it was 
true; but this conunission exercised legislative power — the power 
to prescribe the rates to be charged in the future — and the courts 
can not interfere with constitutional exercise of legislative power. 
But the Federal Trade Conunission was to have no legislative 
power; it was to have no power to prescribe fair methods of 
competition. It was to possess merely the judicial power to order 
the discontinuance of an unfair method of competition; and 
imder the Constitution the power to act finally in a judicial 
capacity can be exercised only by a court The conclusion of 
the Commission as to the facts was conclusive, but its decision 
that the facts found constituted a violation of the law had in the 
nature of the case to be reviewed by the court. Not imtil the 


order of the Commission was sustained did any penalties lie, and 
even if the Commission was sustained, there were no penalties 
unless the order of the court was disobeyed. In that event the 
penalty would be imposed for contempt of court. 

The "unfair competition" provisions of the Trade Commission 
Act should prove very important. The study of individual 
trusts made earlier in this book has made it clear that unfair 
comi>etitive methods have proved a powerful weapon in the 
hands of the trusts to destroy competing enterprises and to 
discourage potential competitors. In so far as the trusts main- 
tain their position by the use of such tactics, the determined 
exercise by the Commission of its powers in this respect will go 
far toward "solving" the trust problem.^ But while this was 
probably the purpose of the law, its incidental effects should 
prove much greater. The law is not limited in its application to 
trusts or combinations; it applies to all corporations subject to 
the jurisdiction of the Commission. And perhaps as important, 
there is legislative approval of the view that ethical principles 
can be applied to business relationships, that "shrewd" tricks 
are not to be justified on the ground that "business is business." 
The commercial world by the acceptance of these principles 
would make an important stride toward raising the plane of 
business competition, and toward a marked reduction in the 
"ruinous" character of competition. 

Miscellaneous Provisions 

Certain miscellaneous provisions may be noted. It is provided 
that the Commission or its agents shall at all reasonable times 
have access to the documentary evidence of any corporation 
being investigated or proceeded against, with the right to copy 
such documentary evidence.* The penalty for refusal on the 

^ For a copy of the decisions of the Commission dealing with unfair meth- 
ods of competition, see Federal Trade Commission Decisions, vol. I (covering 
the period from March 16, 1915, to June 30^ 1919). For an enumeration of 
the methods condemned by the Commission, see Annual Report of the 
Federal Trade Conmiission, 1920, p. 56. 

'Section nine. 


part of a corporation is fine or imprisonment, or both.^ The 
Commission is given power to require by subpoena the attend- 
ance and testimony of witnesses, and the production of all docu- 
mentary evidence relating to the matter under investigation.* 
In case of disobedience to its subpoena the Commission may 
invoke the aid of any court of the United States. Failure to obey 
the order of the court may be punished by the court as a con- 
tempt thereof. In another section it is provided that any person 
who neglects or refuses to attend and testify, or to answer any 
lawful inquiry, or to produce documentary evidence in obedi- 
ence to the subpoena or lawful requirement of the Commission, 
shall be guilty of an offense, and upon conviction thereof by a 
court shall be subject to a fine of $i,ooo to $5,000, or imprison- 
ment for not more than one year, or to both fine and imprison- 
ment.' No person may be excused from testifying or from pro- 
ducing docimientary evidence on the gro\md that the testimony 
or evidence may tend to cruninate hun, but no natural person 
shall be prosecuted on account of any matter concerning which 
he may testify or produce evidence before the Commission in 
obedience to its subpoena.^ To prevent any misuse by the 
employees of the Commission of the information obtained by 
them in the exercise of their duties and powers, it is provided that 
any oflScer or employee of the Commission who shall without 
authority make public any information obtained by the Com- 
mission, unless directed by a court, shall be deemed guilty of a 
misdemeanor^ and be subject to fine or imprisonment, or both.* 
In section eight it is provided that the several departments and 
bureaus of the government shall, when directed by the Presi- 
dent, furnish the Commission, upon its request, all records, 
papers, and information in their possession relating to any cor- 
poration subject to the provisions of the act, and shall detail 
from time to time such officials and employees as the President 
may direct; and in the last section (section 11) it is stated that 
nothing contained in this act shall be construed to interfere with 
the enforcement of the provisions of the anti-trust acts or the 

* Section ten. 'Section ten. * Section nine. 

•Section nine. •Section ten. 


acts to regulate commerce, nor construed to alter, modify, or 
repeal these acts or any part thereof. 


The Trade Commission Act is a unified measure; it creates a \| 
trade commission, and outlines its powers and duties. The U 
Clayton Act, on the other hand, deals with a wide range of I , 
matters, a number of which hardly belong in an anti-trust J 
measure. Its leading provisions may be summarized under^ 
three headings: first, a set of positive prohibitions dealing with 1 
local price discrimination, tying contracts, holding companies, I 
and interlocking directorates; second, remedies; and third, labor / 
provisions. Sections nine and ten, dealing with misconduct on/ 
the part of common carriers, it is not proposed to discuss. / 

Positive Prohibitions 

After defining in section one the terms anti-trust laws,* ccm- 
merce,^ and persons,' the act proceeds in sections two, three, 
seven, and eight, respectively, to piohi^Jt, with certain qualifi- 
cations, (i) l ocal price discrimination. (2) tvini^ contracts^ 
(3) hn1Hin(|r rnn^panips^ and (4) interlocking directorates . The 
purpose of these sections, according to the Senate Committee on 
the Judiciary, was to "make unlawful certain trade practices 
which, as a rule, singly and in themselves, are not covered by 
the act of July 2, 1890, or other existing antitrust acts, and thus, 
by making these practices illegal, to arrest the creation of trusts, 
conspiracies, and monopolies in their incipiency and before 
consummation." * 

' Anti-trust laws include, as in the Trade Commissbn Act, the Sherman 
Act, sections 73-77 of the Wilson Tarifif Act of 1894, and an Act of Feb- 
ruary 12, 1913, amending sections 73-77 of the Wilson Act ; but in addition it 
indudes the Clajrton Act itself. 

' Commerce is defined more broadly than in the Trade Commission Act. 
It indudes insular possessions or other places under the jurisdiction of the 
United States. The Philippine Islands, however, are excluded. The reasons 
for the exclusion of the Islands are given in Senate Report no. 698, 63rd 
Cong., 2nd Sess. 

'The word persons includes corporations and associations. 

* Senate Report no. 698, 63rd Cong., 2nd Sess. 


' (i) Local price discrimination. The detailed study of trusts 
made in the earlier part of this book has shown the pressing need 
for federal legislation dealing with local price discrimination. At 
the time of the passage of this clause at least nineteen sei>arate 
states had laws prohibiting this form of discrimination.^ But 
state legislation is not effective for this purpose, since it 
does not prevent a trust, doing a nation-wide business, 
from making its prices xmiformly low in a given state in 
order to eliminate competition in that state, meanwhile re- 
couping itself for the loss thus sustained by charging high 
prices in the other states. Section two of the act declares 
** that it shall be unlawful for any person engaged in commerce, 
in the course of such commerce, either directly or indirectly 
to discriminate in price between different purchasers of conuno- 
dities, which commodities are sold for use, consumption, or resale 
within the United States or any Territory thereof or the District 
of Columbia or any insular possession or other place under the 
jurisdiction of the United States, where the effect of such dis- 
crimination may be to substantially lessen competition or tend to 
create a monopoly in any line of commerce: Propidedy That 
nothing herein contained shall prevent discrimination in price 
between purchasers of commodities on account of differences in 
the grade, quality, or quantity of the conmiodity sold, or that 
makes only due allowance for difference in the cost of selling or 
transportation, or discrimination in price in the same or different 
communities made in good faith to meet competition: And 
provided further, That nothing herein contained shall prevent 
persons engaged in selling goods, wares, or merchandise in com- 
merce from selecting their own customers in bona fide transac- 
tions and not in restraint of trade." 

The House bill had declared that any person engaged in com- 
merce who discriminated in price between different purchasers, 
**with the purpose or intent thereby to destroy or wrongfully 
injure the business of a competitor," should be deemed guilty of 
a misdemeanor and subject to penalty, either fine or imprison- 
ment, or both. The Senate Committee on the Judiciary was of 

' House Report no. 627, 63rd CoDg., and Sess. 



the opinion, in view of the experimoAtal character of this legisla- 
tion, that it would not be wise to apply the harshness of the 
criminal law; and it therefore struck out the penalty, and put the 
enforcement of this section in the hands of the Trade Commis- 
sicm.^ Some two weeks later, hovrever, the Trade Commission 
Act, conferring upon the Commission power to deal with unfair 
competition, passed the Senate. As the result of this actbn, 
the Committee on the Judiciary recommended that the price 
discrimination section of the Clayton bill (section 2) be struck 
out; and this motion was agreed to by the Senate.^ When the 
bUl went to conference the House conferees objected to the 
elimination of section two, and for several weeks difficulty was 
experienced in reaching an agreement. A compromise, how- 
ever, was finally arrived at. The section was to be restored, but 
its enforcement was to rest with the Commission, and the crimi- 
nal penalties provided in the House bill were to be eliminated. 
The conference committee also accepted the amendment of the 
Senate Committee on the Judiciary that from the prohibitions of 
this section there should be excepted price discrimination due to 
differences in the cost of selling, and price discrimination made in 
good faith to meet competition. For the House provision that 
discrimination in price "with the purpose or intent thereby to 
destroy or wrongfully injure the business of a competitor" was 
prohibited, the conference committee substituted a prohibition of 
price discrimination "where the effect of such discrimination 
may be to substantially lessen competition or tend to create a 
monopoly in any line of commerce." The report of the confer- 
ence conmiittee, as has already been pointed out, was ^>proved 
by both houses without change. 

The local price discrimination section has been the subject of 
much criticism. In particular, objection has been made to the 
elimination of the penalties. As the act now reads, if a trust 
resorts to kxal price cutting which endangers the life of com- 
petitorSy the Commission may cater an order requiring the trust 
to desist But, it is said^ by the time the order of the Commis- 

^ Senate Rqiort no. 69S, 63rd Cong., 2nd Sos* 
'Coog-Recoffd, Au^uit 17, 1914*?' i3&49« 



sion has been sustained by the courts, the independent concern 
may have been compelled to abandon the imequal struggle. 
While the competitor may still sue for and possibly collect 
damages, nevertheless the competition which the act was passed 
to preserve would meanwhile have been eliminated. Vigorous 
objection has also been made to the numerous provisos of the 
section.^ A discrimination "made in' good faith to meet com- 
petition" may seriously interfere with the eflFectiveness of the 
prohibition. Can a trust reduce prices in a given locality be- 
cause an eflSdent independent concern reduces prices? Un- 
doubtedly it can, for otherwise the trust would be unfairty 
hampered in competition for business. But may the trust in 
dealing with this competition merely meet the price of its com- 
petitor, or may it reduce prices still further on its own accoimt, 
reduce them perhaps even below cost? The law appears to place 
no limitation on the amo\mt of the discrimination when competi- 
tion is met, unless that is implied in the words "good faith." 
May not the fear of such destructive action on the part of the 
trust prevent the independent concerns from initiating any price 
reductions, and thus insure the maintenance of monopoly prices? 
Moreover, what discriminations may not be covered up on the 
groimd of differences in grade or quality? Again, what does a 
"substantial" lessening of competition mean? And may not a 
trust forbidden to discriminate in prices effect the same end by 
means of a discrimination in the manner and terms of delivery, 
or by means of more lenient terms of credit? Hie objection has 
been made that section two is surplusage, since local price 
discrimination is but a form of the unfair competition forbidden 
in the Trade Commission Act. This, if true, is a minor objection ; 
the important question is, has the prohibition of unfair compe- 
tition in general been weakened by the specific prohibition of 
price discrimination subject to numerous and perhaps vital 
exceptions? Upon these points we must await the decision of 
the courts. 
(2) Tying contracts. The manner in which " tying " contracts 

' Section two does not forbid the practice of dumping, that b, the sale of 
commodities abroad at lower prices than at home. 


promote monopoly has been described in chapter VIII; and the 
weakness of state legislation in dealing with this evil in the case 
of the United Shoe Machinery Company has also been shown. 
The decision of the Supreme Court in the Dick case (191 2) made 
federal legislation imperative.^ Section three of the act declares 
"that it shall be unlawful for any person engaged in commerce, 
in the course of such commerce, to lease or make a sale or con- 
tract for sale of goods, wares, merchandise, machinery, supplies 
or other commodities, whether patented or impatented, for use, 
consumption or resale within the United States or any Territory 
thereof or the District of Columbia or any insular possession or 
other place under the jurisdiction of the United States, or fix a 
price charged therefor, or discount from^ or rebate upon, such 
price, on the condition, agreement or imderstanding that the 
lessee or piu'chaser thereof shall not use or deal in the goods, 
wares, merchandise, machinery, supplies or other commodities 
of a competitor or competitors of the lessor or seller, where the 
effect of such lease, sale, or contract for sale or such condition, 
agreement or imderstanding may be to substantially lessen 
competition or tend to create a monopoly in any line of com- 
merce. " 

This clause was in substantially thi3 fomi in the biil as it 
passed the House. The Senate Committee on the Judiciary — 
to which the House bill was referred — made three important 
changes. It eliminated the penalties, and put the enforcement 
of the section in the hands of the Trade Commission. It made 
the prohibitions applicable to "contracts for sale" as well as 
to " sales." And it made the prohibitions applicable to commodi- 
ties, etc., whether patented or unpatented. All these amend- 
ments were accepted in conference, and became part of the 
law. The Senate, however, did not accept the clause in the 
fomi recommended by its committee. Its first act was to strike 
out this section of the bill entirely,^ for the same reason that it 
struck out the price discrimination section. But this action 
was clearly unwise. The tying contract when used in connec- 
tion with patented articles would hardly come within the "un- 

* Cf. p. 419. * Cong. Record, August 17, 1914, p. 13S49. 


fair methods of competition" prohibited in section five of the 
Trade Commission Act, since the Supreme Court in the Dick 
case had upheld a contract of this nature as being within the 
rights of the patentee under the law as it then stood. The Sen- 
ate therefore reconsidered its action, and adopted as a substitute 
for the House section a clause prohibiting with criminal penal- 
ties tying contracts in connection with patented articles.^ This 
amendment, according to Representative Webb, one of the 
conferees, was evidently aimed at the United Shoe Machinery 
Company. 2 

The conference committee, after a long discussion, decided 
to accept the House bill as amended by the Senate Committee 
on the Judiciary, with one important change. This was to limit 
the prohibitions of the section to those cases where " the effect 
of such lease, sale, or contract for sale or such condition, agree- 
ment or understanding may be to substantially lessen comp>e- 
tition or tend to create a monopoly in any line of commerce." 
This addition was severely criticized. It was claimed that the 
term "substantial" was broader than the word "unreasonable" 
read into the Sherman Act by the Supreme Court; and that it 
would be difficult to show that competition was "substantially 
lessened." On the other hand, the section without this qualify- 
ing phrase would have prohibited many unobjectionable rela- 
tionships. Manufacturers frequently sell their goods to dealers 
on the condition that these dealers will handle their goods only, 
— a method of disposing of their goods not essentially different 
from the establishment by the manufacturer of agencies for the 
sale of goods on a salary or commission basis. If there are a 
number of dealers in a town this is an effective way — and from 
the viewpoint of public welfare not an objectionable way — of 
distributing the product. But if there are only a few dealers — 
or perhaps only one — then this practice would become objec- 
tionable; and it would be prohibited as substantially lessening 
competition. It was the contracts, leases, etc., that tend to 
create or mamtain monopoly that Congress meant to prohibit; 

* Cong. Record, August 26, 19 14, p. 14276. 

* Ibid., October 7, 1914, p. 16273. 


and these would seem to be prohibited by the clause as it now 

(3) Holding companies. The trust movement, as has been 
shown in chapter IV, was in large measure a holding coihpany 
movement, and it was therefore to be expected that the trust 
legislation would deal with holding companies. Moreover, Presi- 
dent Wilson in his message to Congress had urged their prohibi- 
tion. Section seven of the act provides "that no corporation 
engaged in commerce shall acquire, directly or indirectly, the 
whple or any part of the stock or other share capital of another 
corporation engaged also in commerce, where the effect of such 
acquisition may be to substantially lessen competition between 
the corporation whose stock is so acquired and the corporation 
makmg the acquisition, or to restrain such commerce in any 
section or community, or tend to create a monopoly of any line 
of commerce." The second paragraph of this same section (§ 7) 
contains a prohibition in almost identical language against any 
corporation (whether engaged m commerce or not) acquiring the 
stock of two or more corporations engaged in commerce, where 
the effect of such acquisition, or the use of such stock by the 
voting of proxies or otherwise, may be to substantially lessen 
competition, etc. This deals of course with the pure holding 
company, not itself engaged in commerce. 

These prohibitions, which included common carriers, do not, 
however, apply imfailingly. They do not apply to corpora- 
tions purchasing such stock solely for investment, and not using 
the stock to bring about the substantial lessening of competition. 
They do not prevent corporations engaged in commerce from 
causing the formation of subsidiary corporations for the actual 
carrying on of their immediate lawful business, when the effect 
of such formation is not "to substantially lessen competition." 
They do not prevent conmion carriers from constructing or 
acquiring branch raihoads, or extending their lines through the 
acquisition of stock in other common carriers, when there is no 
substantial competition between the common carrier and the 
concern acquired by it. And finally, and more important, 
nothbg contained in this section shall be held " to affect or 


impair any right heretofore legally acquired." In other words, 
this section does not make illegal those holding companies which 
had been organized in the past for the purpose of creating 
monopolies. An amendment to this section to make these prohi- 
bitions relate to "existing" holdings of stock was introduced by 
Senator Cummins, but defeated by a vote of 16-37.^ In order, 
however, not to legalize the holding companies already organ- 
ized, it is further provided "That nothing in this section shall be 
held or construed to authorize or make lawful anything hereto- 
fore prohibited or made illegal by the antitrust laws, nor to 
exempt any person from the penal provisions thereof or the dvil 
remedies therein provided." The holding companies then in 
existence were thus to retain the status at law which they then 
bad. And that status is one of illegality when the result is an 
unreasonable restraint of trade or the creation of a monopoly. 

(4) Interlocking directorates. The necessity of some legisla- 
tion to regulate interlocking control of competing companies 
hardly need be argued. As the House Committee said: "The 
concentration of wealth, money, and property in the United 
States imder the control and in the hands of a few individuals or 
great corporations has grown to such an enormous extent that 
unless checked it will ultimately threaten the perpetuity of our 
institutions." ^ Section eight of the act provides that after two 
years no person shall be at the same time a director in two or 
more corporations engaged in commerce, other than banks * and 
common carriers,^ any one of which has a capital, surplus, and 
undivided profits exceeding $1,000,000, if such corporations are 
or have been theretofore competitors, " so that the elimination of 
competition by agreement between them would constitute a 
violation of any of the provisions of any of the antitrust laws." 
But a director whose election was not prohibited by this act 
might continue as a director for one year after his election, even 

* Cong. Record, August 31, 1914, p. 14476. 

• House Report no. 627, 63rd Cong., 2nd sess. 

• There were separate provisions dealing with banks. 

* It was intended to deal with common carriers in the bill regulating the 
issue of securities; but this bill failed of passage. 


though meanwhile there occurred such changes in the affairs of 
the corporation as would, were it not for this proviso, affect his 
ehgibility to act as a director. 

While the courts in various dissolution decrees have enjoined 
the concerns into which a trust has been dissolved from having 
common directors, the Clayton Act makes illegal the interlocking 
of directors among concerns which actually compete, provided 
that an agreement among these concerns would be ill^al. In 
one respect, therefore, it goes further than the Sherman Act as 
interpreted by the courts, since the ill^ality attaches not only to 
a restraint on competition, but to such relationships as might 
lead to such restraint. 

The Interlocking Directorates bill as originally introduced in 
the House was very drastic; it declared that the presence of the 
same individual upon the board of directors of any two corpora- 
tions engaged in interstate commerce, which by virtue of their 
location and operation were naturally competitors, would con- 
stitute a combination in restraint of commerce subject to all 
the penalties of the Sherman Act. But the House softened this 
provision materially, though it voted to retain the criminal 
penalties. The Senate, however, struck out the criminal penal- 
ties; and the bill became law substantially as adopted by it. 
While undoubtedly the Administration bill was imnecessarily 
severe, and while the removal of the penalties may have been 
advisable, it is doubtful whether the law, in so far as it deals with 
interlocking control, is sufficiently comprehensive. In the first 
place it deals solely with interlocking directorates. It does not 
mention interlocking officers or employees, and yet by such 
devices competition may be quite effectively restrained, not to 
mention the possibilities of abuse of trust on the part of the 
oflicers or employees holding positions in several corporations. 
It is true that the courts in dissolution decrees have enjoined the 
segregated companies from having common officers, yet ob- 
viously it would be more effective by legislative act to prohibit 
competing corporations to have common officers (when the 
elimination of competition by agreement between them would 
constitute a violation of the antitrust laws), than to secure a 


court injunction against this* practice after competition has 
already been restrained. Again, the act does not prohibit 
interlocking control of competing companies through stock 
ownership by individuals. So long as the same individual, or 
group of individuals, controls two potentially competitive con- 
cerns, competition will be absent The fact that these indi- 
viduals may be prohibited to act as directors in both concerns 
will not prevent them from exercising control through dummy 
directors, voting trusts, or otherwise. Neither Congress nor 
the President seem to have been willing to interfere with the 
right of an individual to acquire stock in competing corporations, 
though the President did raise the question for the considera- 
tion of Congress. But our experience with the oil and the 
tobacco trusts has demonstrated that no dissolution whidi 
does not prevent the companies into which the trust is divided 
from being owned by the same group of stockholders is likely to 
prove effective. Both Attorney Generals McReynolds and 
Gregory have recognized this fact, and subsequent dissolution 
suits may therefore prove more effective in this re^)ect. Until 
Congress also comes to this point of view, its prohibitions will 
fall short of providing an adequate remedy for the evik with 
which they deal more or less half-heartedly. 


The remedies against the imlawful practices previously 
described may be next considered. Four leading remedies are 
provided: (i) enforcement through the Federal Trade'Commis- 
sion (or Interstate Commerce Commission or Federal Reserve 
Board); (2) individual suits for three-fold d£^HJiges;j[3) suits 
brought by the United States government; (4) individual suits 
for injunctive relief. 

(i) Enforcement through a commission. The Clayton 
bill as it passed the House punished with criminal penalties any 
violation of the sections dealing with local price discrimination, 
tying contracts, holding companies, and interlocking directo- 
rates. But in the Senate section two was eliminated, and crimi- 
nal penalties were removed from sections seven and eight, the 


enforcement of these two sections being put in the hands of the 
Federal Trade Commission and the Interstate Commerce Com- 
mission. This was done in order to bring the bill into harmony 
with the Trade Conmiission Act, which, as passed by the Senate, 
gave the Trade Conmiission jurisdiction over unfair methods of 
competition in general. The removal of the criminal penalties 
met with vigorous opposition. It was predicted that litigation to 
enforce the Commission's orders would be long drawn out, and it 
was pointed out that even if the Conmiission should be sustained 
by the courts no penalties of any kind would accrue. But these 
protests were imavailing. The conference committee accepted 
the amendment of the Senate, and on its own account removed 
the criminal penalty from the Senate section dealing with tying 

The special procedure for the enforcement of sections two, 
three, seven, and eight of the Clayton Act is found in section 
eleven. Authority to enforce these sections is vested in the 
Interstate Commerce Commission, when they apply to common 
carriers; in the Federal Reserve Board, when they apply to banks 
and trust companies; and in the Federal Trade Commission, 
when they apply to other corporations. Instead of proceeding to 
prevent unfair methods of competition only if a proceeding 
would be in the interest of the public, as in section five of the 
Trade Commission Act, these commissions or boards are directed 
to prevent all violations of these sections. In all other respects 
the procedure is identical with that provided in the Trade Com- 
mission Act for the prevention of imfair methods of competition. 

(2) Individual suits for three-fold damages. Section four of 
the act reenacts with a few minor changes section seven of the 
Sherman Act. Any person injiured in his business or property by 
reason of anything forbidden in the anti-trust laws may bring 
suit in any district court of the United States in the district in 
which the defendant resides or has an agent,^ and recover three- 
fold damages, and the cost of the suit. 

* The words " or has an agent" are not in section seven of the Sherman 
Act. Their incorporation in the law greatly facilitates the bringing of suits 
for damages. 


This remedy has been given additional effectiveness through a 
provision in section five of the act ** thaCt a final judgment or de- 
cree hereafter rendered in any criminal prosecution or in any suit 
or proceeding in equity brought by or on behalf of the United 
States under the antitrust laws to the effect that a defendant has 
violated said laws shall be prima facie evidence against such 
defendant in any suit or proceeding brought by any other party 
against such defendant under said laws as to all matters respect- 
ing which said judgment or decree would be an estoppel as 
between the parties thereto;" and through a provision that 
during the pendency of the government suit the statute of limi- 
tations shall be suspended in respect of private rights of action. 
It was provided, however, that this section shall not apply to 
consent judgments or decrees entered before any testimony had 
been taken; nor to any consent judgments or decrees that may 
be rendered in criminal proceedings or suits in equity, then 
pending, in which the taking of testimony had been commenced 
but not concluded, provided such judgments or decrees were 
rendered before any fiu'ther testimony was taken. 

Section five was designed to facilitate the bringing of suits, 
particularly by persons of small means, to recover damages for 
injury sustained on accoimt of a violation of the anti-trust laws. 
It was in keeping with the recommendation of the President, 
who in his annual message had said that it was not fair that the 
private litigant should be obliged to set up and establish again 
the facts which the government had already proved. The House 
bill had made the decree of the court conclusive evidence, but the 
constitutionality of this phrase was attacked, and the conference 
committee accepted the Senate amendment making the decree of 
the court prima facie evidence. Consent decrees were exempted 
from a fear that otherwise concerns charged with violating the 
law would refuse to consent to a voluntary readjustment of 
their affairs, preferring instead to take their chances on a favor- 
able court decision. The Senate bill had provided that final de- 
crees "heretofore rendered," as well as those hereafter rendered, 
should be prima facie evidence, but this was struck out in 
the conference conunittee. The exclusion of these words was 


criticized in the Senate as showing special tenderness to the 
Standard Oil and other trusts, evidence against which had been 
seciired by the government with great difficulty and at great 

(3) Suits brought by the United States government. Section 
fifteen of the act invests the district courts of the United States 
with jurisdiction to prevent and restrain violations of the act, 
and makes it the duty of the district attorneys of the United 
States, in their respective districts, imder the direction of the 
Attorney General, to institute proceedings to enforce the act. 
This section is identical with sections four and five of the Sher- 
man Act, except that jurisdiction is vested in the district courts 
rather than in the circuit coiu*ts, the latter having been abolished 
in 19x1. 

The United States government through the Department of 
Justice has jurisdiction, it should be observed, over all violations 
of the act, including violations of sections two, three, seven, and 
eight. With respect to these sections, therefore, the Department 
of Justice shares jurisdiction with the Federal Trade Commis- 
sion, the Interstate Commerce Commission, and the Federal 
Reserve Board. Whether this will lead to friction between these 
government agencies remains to be seen. 

In dealing with violations of the act the hands of the govern- 
ment are strengthened by section fourteen, which, in line with 
the recommendation of the President, makes guilt personal. 
This section declares " that whenever a corporation shall violate 
any of the penal provisions of the antitrust laws, such violation 
shall be deemed to be also that of the individual directors, officers, 
or agents of such corporation who shall have authorized, ordered, 
or done any of the acts constituting in whole or in part such vio- 
lation," and such violation shall subject the director, officer, or 
agent to the penalty of a fine not exceeding $5,000, or to impris- 
onment for a period not to exceed one year, or to both, in the 
discretion of the court. 

The "personal guilt" section applies only to the penal pro- 
visions of the anti-trust laws, which limits it to sections one to 
three of the Sherman Act, section seventy-three of the Wilson 


Tarifif Act of 1894 as amended in 1913, and sections nine and 
ten of the Clayton Act. As this section passed the House it 
applied to any violation of the anti-trust laws. But in the Sen- 
ate the word penal was inserted, and the penalties were elimin- 
ated except from section three, dealing with tying contracts. 
These changes being accepted in conference (the conference 
committee on its own account took out the penalties from sec- 
tion three), the net result was to limit greatiy the scope of this 
section. Whether the result was also to reduce its effectiveness 
depends on tiie relative merits of criminal and civil remedies. 
Were juries willing to convict, undoubtedly the criminal rem- 
edies would be the more effective; but as a matter of fact, juries 
have shown a reluctance to apply the harsher remedy. Perhaps, 
now that the anti-trust laws have been aflSrmed and the pro- 
vision for personal guilt inserted, they will become more stem 
in this regard. On the otiier hand, in some respects dvil rem- 
edies are more effective. In a criminal prosecution suit may be 
brought only by the Department of Justice, and guilt must be 
established beyond a reasonable doubt; whereas in a civil action 
any one can bring suit, and a preponderance of evidence suffices. 

(4) Individual suits for injunctive relief. Section sixteen 
provides that any person or concern is entitied to injunctive 
relief, in any court of the United States having jurisdiction over 
the parties, against threatened loss or damage by a violation 
of the anti-trust laws, including sections two, three, seven, and 
eight of the Clayton Act; and that a preliminary injimction is 
to be issued upon a showing that the danger of irreparable 
damage is immediate, and upon tiie execution of a bond against 
damages for an injimction improvidentiy granted, provided, 
that only tiie United States may bring suit for injunctive relief 
against common carriers. The express provision that the new 
method of relief is to apply to sections two, three, seven, and 
eight, shows conclusively that the remedy of Commission en- 
forcement provided in section eleven is cumulative in character 
and not exclusive. 

Section sixteen gives the person or concern injured m his (or 
its) business a remedy that it had not possessed before. For- 


merly only the United States government, under the direction of 
the Attorney General, could enjoin a violation of the anti-trust 
act; and if the Attorney General was negligent no injunctive 
relief coiild be had. As the law now stands a n independent 
c oncern attacked through some unfair de ^ce ma y secure an 
inj unctio n against the employment of this deVre^ and thus pro- 
tect its existence, rather t han sue ior damages; as formerly, 
after injury and perhaps bankruptcy had reSUltcA In addition, 
the business public becomes the ally of the Government in en- 
forcing the anti-trust laws. 

Reference may also be made to section twelve, which liberal- 
izes the procedure in the courts by providing that suit under the 
anti-trust laws against a corporation may be brought, not only 
in the judicial district whereof it is an inhabitant, as under the 
law previously, but also in any district where it may be foxmd or 
transact business. This clause makes it easier to bring suit, 
since it largely does away with long distance litigation, and thus 
decreases the expense to the plaintiff. 

The possibility that the whole act will be rendered invalid 
by reason of the unconstitutionality of any part thereof is 
eliminated by the provision that the judgment by any court 
of competent jurisdiction that any clause, sentence, paragraph, 
or part of the act is invalid is not to impair or invalidate the 
remainder of the act.^ A similar provision had been inserted 
in the Tariff Act and the Federal Reserve Act, both enacted 
the previous year. 

Labor Provisions 

The Clayton Act contains a number of provisions much 
desired by labor organizations. Thus section twenty limits the 
use of the injxmction in labor disputes, and appears to legalize 
strikes, picketing, and boycotts.^ And section six -declares 
**that the labor of a human being is not a commodity or article 
of commerce. \ Nothing contained in the antitrust laws shall 

*Sectioii twenty-six. 

* But see the decision of the Supreme Court in the Duplex Printing Press 
Company case, 254 U. S. 443. (January 3, 1921}, 


be construed to forbid the existence and operation of labor, 
agricultural, or horticultural organizations, instituted for the 
purposes of mutual help, and not having capital stock or con- 
ducted for proht, or to forbid or restrain indi^ddual members 
of such organizations from lawfully carrying out the legitimate 
objects thereof; nor shall such organizations, or the members 
thereof, be held or construed to be ill^al combinations or con- 
spiracies in restraint of trade, under the antitrust laws.^ 

This section, together with section twenty, has been ac- 
claimed as constituting a bill of rights for labor. While there is 
some doubt as to the interpretation which these provisions will 
receive at the hands of the courts, there is no doubt that organ- 
ized labor considers that it has won a great victory. President 
Gompers, of the American Federation of Labor, has said that 
the declaration that the labor of a human being is not a com- 
modity or article of commerce "is the Industrial Magna Carta 
upon which the working people will rear their structure of indus- 
trial freedom." ^ On the other hand, an economist of note 
refers to this declaration as an "empty blague." ^ The provi- 
sions that nothing contained in the anti-trust laws shall be con- 
strued to forbid the existence and operation of labor organiza- 
tions, and that these organizations, or their members, shall not 
be held to be illegal combinations or conspiracies in restraint of 
trade under the anti-trust laws apparently removes doubt as to 
the legality of such organizations, — organizations which for- 
merly, according to Mr. Gompers, existed only on the suffer- 
ance of the administration.^ The above provisions apply like- 
wise to agricultural and horticultural organizations not having 
capital stock or conducted for profit. However, unlike the labor 
organizations, many agricultural organizations have capital 
stock, and most of them are conducted for profit; ^ and therefore 
this exemption will not be likely to have such broad conse- 
quences as the exemption of labor organizations, unless indeed 

* American Federationist, 21, pp. 971-2 (November, 1914). 

* Young, Journal of Political Economy, 23, p. 418. 

• House Report no. 627, 63rd Cong., 2nd Sess. 

♦ Ibid. 


the courts hold that the latter are conducted for profit. The 
provision that nothing in the anti-trust laws shall be construed 
to forbid or restrain individual members of labor and agricul- 
tural organizations from "lawfully carrying out the legitimate 
objects thereof" would appear to be meaningless. It is difficult 
to conceive of a law forbidding an organization from lawfully 
carrying out its legiHmate objects. 



(The only important anti-trust legislation enacted since 1914 
istne Webb-Pomerene Act, designed to promote the American 
export trade through the legalization of export associatiogg^ It 
is proposed in this chapter to outline briefly the conditions that 
gave rise to a demand for such legislation; to trace the progress 
of the bill through Congress; to describe the provisions of the 
act; and to call attention to some possible objections. First 
a^4p the conditions that led to the passage of the Webb Act. 

Vj^ring the early years of the twentieth century it was freely 
predicted that American manufacturers, combined as many of 
them were^in the modem trust, were to capture the markets of 
the world. Only a few years later the opinion was as commonly 
expressed that without legislation permitting cooperation in the 
American export trade our manufacturers were no match for 
their foreign competitors. Severat reasons were given for the 
unequal conditions of competition. In t he first place, Americ an 
manufacturers in striving for business abroad h ad to meet the 
vigorous rivalry of powerf ul foreign comD mations. often inter- 
national in scope. These combinations were frequently aided 
by their respective govemmentSj^and in some cases partici- 
pated in by these governmen ts. J he stock illustration was 
Germany, which had achieved the most notable success in the 

*0n the Webb-Pomerene Act see: Congressional Record, vols. 53-56; 
Report of the Federal Trade Commission on CooF>eration in American Ex- 
port Trade, in two parts; House Report no. 11 18, 64th Cong., ist sess.; 
Senate Report no. 1056, 64th Cong., 2nd sess.; House Report no. 50, 65th 
Cong., ist sess.; Proceedings of the National Foreign Trade Conventions; 
Duncan, Journal of Political Economy, 25, pp. 313-338 (191 7); Notz, Journal 
of Political Economy, 27, pp. 525-543 (1919); and Notz, Yale Law Journal, 
29, pp. 29-45 (1919). 



rapid development of its foreign trade and which, being highly 
unpopular after 1914, furnished a good talking point. However, 
such combinations were common in other countries, for example, 
Belgiimi, Holland, Italy, and Japan. In Great Britain, on the 
other hand, despite the absence of widespread combination, a 
large and profitable export trade was being maintained. This 
was attributed to the unusually favorable conditions, notably 
the advantage of an early start, the possession of excellent ship- 
ping and banking facilities, and the high grade of service ren- 
dered by the British conunission merchants, not to mention the 
export houses buying and selling goods for export on their own 
account. Some American companies, particularly the United 
States Steel Corporation, the Standard Oil Company, and the 
International Harvester Company, were admittedly strong 
enough to cope with these foreign combinations, yet the smaller 
concerns in these industries, as well as nearly all of the concerns 
in certain industries in which competitive conditions prevailed, 
were said to be at a great disadvantage. Hence the need of 

Secondly, in the l eading coxmtries of the world a ssociations 
for the promotion of expo rt business were permitted, — an ad - 
vant ^e that the ShermajPAct de med, so it was believed, to 
American exporters. In Germany, for example, prior to the 
war there were 600 important cartels, many of which dominated 
the export trade in their particular industry.^ These cartels 
made an especial effort to extend the foreign trade, frequently 
selling at a loss in the endeavor to gain a foothold or to maintain 
a position once established. In order that such agencies might 
be met on more equal terms the association of American manu- 
factiu-ers in a conmion selling agency was held to be necessary. 
The need for such association, it may be observed, was not 
equally great in all branches of the export trade. Thus, Ameri- 
can foodstuffs and raw materials could readily be sold even 
without an export organization, though cooperation might 

* Report of the Federal Trade Commission on Cooperation in the Ameri- 
can Export Trade, I, p. 5. Hereafter referred to as Report on Cooperation in 
American Export Trade. 


somewhat reduce the cost of distribution, and might increase 
the bargaining power of American producers. There was e\'en 
less occasion for association of the manufacturers of specialties. 
Here the lack of standardization would make difficult the work 
of an export organization. Moreover, less competition was 
encoimtered in the sale of ^)ecialties, such as safety razors, 
for example, and as a result cooperation was not so important. 
Of course, the exporters of specialties also had to create their 
market abroad, but many of them had foimd it to their advan- 
tage to do this individually. It was in the manufactured staples 
that the advantages of cooperation were most marked. Such 
goods met vigorous competition abroad, often at the hands of 
large organizations. To capture foreign trade under such cir- 
cumstances it was usually necessary to study the foreign re- 
quirements; to employ salesmen familiar with foreign conditions 
and customs; to advertise and demonstrate; to keep in touch 
with credit conditions, so that credit might be extended wisely; 
to establish abroad branches and warehouses in order that the 
foreign customer might coimt on prompt and regular deliveries; 
in a word, to maintain an effective s)rstem of direct representa- 

Even in the foreign trade in manufactured staples export 
associations were not always necessary or even advantageous. 
In many branches there existed highly efficient export commis- 
sion houses handling sales on a commission basis, and export 
merchants buying and selling goods on their own account. These 
agencies in both Great Britain and the United States had played 
a notable part in the development of export trade, 'fe fact, 
British export trade had been largely built up through their 
efforts.^ These export houses had already developed efficient 
organizations, which were familiar with foreign conditions; 
and they now possess an advantage over associations in this 
country by virtue of the fact that they handle imports as well as 
exports, whereas the American associations under the provisions 
of the Webb Act may deal solely in exports. For the export 
houses, owning their own ships, as many of them do, the han- 
^ See Report on Cooperation in American Export Trade, I, p. 94; IT, p. 320. 


dling of imports as well as exports represents an undoubted saving 
in transportation, in that it more commonly provides a cargo in 
both directions. However, the system of direct representation 
also has its advantages. Thus it is to be anticipated that the 
foreign trade in any particular article, and of course the domestic 
trade also, will be more effectively pushed by an agency whose 
capital is invested in plants and equipment devoted to the man- 
facture of that product than by an agency having no such invest- 
ment and dealing in a great variety of products. An association 
obviously has an individual interest in its product, an interest 
which an export house in the very nature of the case lacks. 

Thirdly, in some of the forei gn markets American produc ers 
were conf ronted with well Qxif^^^^-^ combinat ions of buyers. 
Thus, four London concerns were said to fix the price of silver, 
and American exporters in making sales in Great Britain, India 
and elsewhere had to accept the price fixed by these firms. ^ For 
some time past the world's copper trade had been controlled by 
a German metal-buying agency.^ Such associations, it was said, 
by playing off one American exporter against another were able 
to beat down the price of American goods destined for export. 
In the case of copper the aforementioned German concern, 
according to Mr. John D. Ryan, president of the Amalgamated 
Copi>er Company, by means of such tactics bought American 
copper delivered abroad during 1903 to 1913 at 83/100 of a cent 
per pound less than domestic buyers paid for delivery at New 
York or the Connecticut Valley.^ The association of American 
producers in a selling agency, it was claimed, would eliminate the 
competition between American firms, and thus make it possible 
for them to secure better prices for articles sold abroad. 

Finally, the Hpvelnpment pf our expor t trade was said to be 
hampe red bv inadequate banking an d credit facilities abroad: by 
discrimination against American goods by foreign steamship 
lines; by the small amount of American investments in the 
securities of foreign companies; and by our comparative inex- 

* KcpoTt on Cooperation in American Export Trade, I, p. 7. 

* Ibid., p. 7. 

' Ibid., II, p. 261. 


perience. The last obstacle perforce had to be overcome by the 
producers and manufacturers themselves. Upon them neces- 
sarily fell the task of developing the requisite organization, of 
acquiring an intimate acquaintanceship with the requirements of 
foreign markets, and by attention to quality and service of 
creating a demand for products ''Made in America." The 
additional business that comes through investments in foreign 
enterprises was to be secured by a campaign to educate American 
investors in the advantages of foreign securities, — a campaign 
now well under way. The other difficulties we re to be met by 
legislation permitting foreign banking, est ablishing an American 
merchant marine, and authorizmg producers and manufacturers 
to combine for export pu rposes. The Webb bill was thus only 
one stone in the foundation upon which our increased foreign 
trade was to rest. 

The desirability of legalizing associations for export trade was 
inquired into by the Federal Trade Commission under the powers 
granted to it in § 6 (h) of the Trade Commission Act, and a deci- 
sion highly favorable to the principle underlying the Webb Act 
was reached.^ The Commission pointed out that such laige 
concerns as the United States Steel Corporation, the Interna- 
tional Harvester Company, the United Shoe Machinery Com- 
pany, the National Cash Register Company, the General Electric 
Company and others did not need to enter into export associa- 
tions, since they individually were well able to compete with 
foreign combinations.^ Rather the purpose of the Webb bill was 
to enable a number of smaller companies not having a large 
enough volimie of business to justify the carrying on of an export 
trade by themselves to cooperate for this purpose and, by dis- 
tributing the overhead charges over their combined foreign sales, 
to bring the costs down to a reasonable figure. Other advantages 
to be gained through cooperative action were the securing of 
better credit information and thus the better financing of foreign 
business, an ability to give longer credits when desirable, the 
greater ease with which initial losses could be carried, a larger 

' See Report on Cooperation in American Export Trade, I, p. 379. 
'Ibid., pp. 161-162, 242. 


assortment of goods, and the exchange of ideas among the 
members of the association. While there is some reason to 
believe that an association of competing concerns to share the 
expenses of a foreign selling agency was not in fact prohibited by 
the anti-trust laws,^ provided it did not embrace too large a 
percentage of the trade, nevertheless the uncertainty as to the 
legal status of such an arrangement had deterred many concerns 
that were anxious to cooperate from making the venture. The 
Commission after a study of the legal aspects of the problem was 
unable to assure manufacturers that common selling agencies 
were lawfid; and accordingly it recommended the passage of an 
act that would place this right beyond dispute. This reconunen- 
dation was made, however, subject to the condition that ample 
precautions be taken to prevent the export associations from 
being used to restrain trade in the United States in violation of 
the Sherman Law.^ 

The campaign to legalize export associations was launched 
at the first convention of the National Foreign Trade Coimcil, 
held in Washington, D. C, toward the close of May, 1914. 
There was thus no connection between the initiation of this 
movement and the European war. However, the outbreak of the 
war on August i, 1914, followed as it was by a short period of 
depression in this coimtry, presented conditions favorable for an 
agitation to legalize combinations for the export trade, — it being 
alleged that foreign business was necessary to " keep the home 
fires burning" and to provide employment for labor. In May, 
1915, the Federal Trade Commission, organized only two months 
previously, began an investigation of the foreign trade with par- 
ticular reference to the advisability of permitting cooperation. 
A summary of its findings, made public in May, 1916, strongly 
recommended the enactment of permissive legislation.^ At the 

^ Some such associations, believed to be legal, had been organized prior to 
the passage of the Webb Act. See Official Report of the Fourth National 
Foreign Trade Convention, 191 7, p. 187. 

' Report on Cooperation in American Export Trade, I, p. 10. 

'The full report, in two volumes, though dated June 30, 1916, was not 
published until December, 1916. 


date of this report a vast foreign trade was being carried on, 
and there was no immediate occasion for concern on this score. 
The campaign cry was thus modified to meet the new situation. 
Attention was now directed to the tremendous struggle for for- 
eign trade that would manifest itself upon the conclusion of 
hostilities, and the country was urged by the interested parties to 
have its loins girded for the fray when it arrived. 

The Webb bill was first introduced in the House by Repre- 
sentative Webb of North Carolina on August 8, 1916, some three 
months after the publication of the siunmary of the report of the 
Federal Trade Commission. It was referred to the Committee 
on the Judiciary, of which Mr. Webb, who had so skilfully and 
tactfully piloted the Clayton Act through the House two years 
previously, was chairman. After being amended in important 
particulars, the significance of which will be noted later,^ it 
passed the House on September 2 by a vote of 199-25.^ Six days 
later the Senate adjourned; and the Webb bill was permitted 
to sliunber in committee. 

President Wilson in his address to the next Congress on 
December 5, 1916, urged the prompt passage of the Webb bill. 
He presented no argimient on behalf of the bill, but merely 
pointed out that a great opportunity in foreign trade had pre- 
sented itself, and that this opportunity might escape us if we 
hesitated or delayed to remove the legal obstacles that stood in 
the way. 

Notwithstanding the reconunendation of the President the 
Webb bill made practically no progress during the short session 
from December 4, 1916, to March 4, 1917. The Senate Com- 
mittee on Interstate Commerce, of which Senator Pomerene was 
chairman, reported out the bill on February 16, 1917, with 
amendments, but the measure was not discussed in either the 
Senate or the House. 

During the next session (April 2, 1917-October 6, 1917) the 
bill in amended form passed the House for the second time, but 
did not come to a vote in the Senate. The bill as reported out 
by the House Committee on the Judiciary on May 11, 191 7, was 

^ See p. 382. * CoDg. Record, Sq>tember 2, 1916, p. 13732. 


revised in several important particulars to conform to the sug- 
gestions of the Senate Committee on Interstate Commerce. As 
revised by the House Committee, but without any further 
dianges, it passed the House on June 13 by a vote of 242-29, 
having been debated on only one day, the day of its passage.^ 
The measure was briefly debated in the Senate on three separate 
days, but it was not put to a vote, Senator Pomerene having 
concluded after an investigation that it was impossible to secure 
action during the current session. 

With the convening of the second session of the 6sth Congress 
President Wilson on December 4, 1917, agaih called the attention 
of Congress to the Webb biU, saying it " ought by all means to be 
completed at this session." ^ On this occasion the Senate was 
prompt indeed. It debated the measure for four days, and on 
December 12 accepted it, slightly amended, by a vote of 51-11.' 
The House objected to the Senate amendments, and conferees 
were therefore appointed. The report of the conference com- 
mittee was presented on April 2, 1918; and was accepted by both 
the Senate and the House on April 6. The bill was signed by the 
President on April 10. 

xha^g^ll ill fjivi^*^ ^"^^ fiye sections. Section one is devoted to 
a definition of certain terms used in the act. The word " associa- 
tion" is defined as "any corporation or combination, by contract 
or otherwise, of two or more persons, partnerships,, or corpora- 
tions." iTlie words "export trade" mean "solely trade or 
commerce in goods, wares, or merchandise exported, or in the 
course of being exported from the United States or any Territory 
thereof to any foreign nation; but . . . shall not be deemed to 
include the production, manufacture, or selling for consumption 
or for resale, within the United States or any Territory thereof, 
of such goods, wares, or merchandise, or any act in the course of 
such production, manufacture, or selling for consumption or for 
resale." * J 

*Cong. Record, June 13, 1917, p. 3584. 

*Ibid., December 4, 1917, p. 20. 

'Ibid., December 12, 1917, p. 186. 

* Id the opinion of the Federal Trade Commission, trade with the Philip- 


The bill as it had passed the House on September 2, 1916, 
instead of providing that "export trade" should not be deemed 
to include the production, manufacture, or selling for consump- 
tion or for resale within the United States of exported goods, had 
provided that it should not be deemed to include the production, 
manufacture, trading in^ or marketing within the United States 
of such goods.^ In this form obviously the measure was highly 
unsatisfactory to those desiring to form export associations; for 
imless an export association could either produce or trade in, 
that is, buy, the articles to be exported, its activities would be 
limited to handling goods on a commission or agency basis, if 
indeed that was permissible. If it was deemed advisable to 
allow export associations there was no virtue in unduly hamper- 
ing them; and accordingly the Senate struck out the words 
"trading in, or marketing," and substituted the words "or sell- 
ing for consumption or for resale." By these changes, con- 
curred in by the House, an export association was permitted 
to purchase goods in this coimtry for export purposes, but 
it might not produce them itself nor sell them in this 

Section two provides that nothing in the Sherman Act of 
1890 "shall be construed as declaring to be illegal an associa- 
tion entered into for the sole purpose of engaging in export 
trade and actually engaged solely in such export trade, or an 
agreement made or act done in the course of export trade by 
such association, provided such association, agreement, or act 
is not in restraint of trade within the United States, and is not 
in restraint of the export trade of any domestic competitor of 
such association: And provided further, That such association 
does not, either in the United States or elsewhere, enter into any 
agreement, understanding, or conspiracy, or do any act which 
artificially or intentionally enhances or depresses prices within 
the United States of commodities of the class exported by such 

pine Islands, Porto Ricx), and Hawaii is not export trade. Annual Report, 
1918, p. 40. 

* See text of bill in Annual Report of the Federal Trade Commission, 
1916, pp. 6a-6i. 


association, or which substantially lessens competition within 
the United States or otherwise restrains trade therein." 

Section two of the act as above quoted is identical with the 
bill as it first passed the House down to the words "in restraint 
of trade within the United States;" but differs vitally from that 
point on. The House bill had legalized export associations pro- 
vided they were not in restraint of trade within the United 
States, and provided they did not restrain the export trade of the 
United States} The Senate Committee on Interstate Commerce 
pointed out that this second proviso took away a right granted 
elsewhere in the bill to enter into associations and make agree- 
ments in restraint of export trade; and it accordingly modified 
the proviso so that it merely forbade a restraint of the export 
trade of any domestic competitor of such association} This 
change was accepted by the Senate and the House. Having 
removed, however, the prohibition against the restraint of the 
export trade of the United States, it became necessary to pro- 
vide in some way against the use of such associations to influ- 
ence prices improperly in this country. Accordingly the Senate 
Committee added the last proviso dealing with prices in the 
United States. The bill as it became law is identical with the 
amendment of the Senate Committee except in three particu- 
lars: (i) the Senate inserted the words "or depresses" after 
"enhances" in order to prevent export associations from beat- 
ing down the prices of goods purchased by them; ^ (2) the Senate 
struck out the words "and unduly" enhances prices, from an 
imcertainty as to the meaning of "undue" enhancement; ^ and 
(3) the conference committee added the words at the close of 
section two reading "or which substantially lessens comp>eti- 
tion within the United States or otherwise restrains trade 

* This second proviso was not in the bill as originally introduced in the 
House by Mr. Webb, but he agreed to the change. See Cong. Record, 
September 2, 1916, p. 13725. 

' See Senate Report no. 1056, 64th Cong., 2nd Sess. 

• Cong. Record, May 23, 1917, p. 2787; and September 22, 1917, p. 7325. 
^Ibid., December 12, 191 7, p. 184. 


Section three amends section seven of the Clayton Act by 
providin g that a gy corp g nitioP "^''3' Qr/|iiirA all nr port /if ^ht^ 

st ock or other capita l, of anv COnfipa-ny nr ^tiijir^pH in a£rorHanrf! 

with t he terms of the W e bb Act^ " unless the effect of such acqui- 
sition or ownership may be to restrain trade or substantially 
lessen competition within the United States." 

Secti on four decl ares that the provisions of the Trade Com- 
mission Act with regard to unfair methor^s of rnmp(>t^HnTi 
** shall be construed as extending to unfair mjthods of competi- 
tion used in export trade against competitors engaged in export 
trade, even though the acts constituting such unfair methods are 
done without th^ territorial jurisdiction of the United States." 
This s ection extends the jur isdiction of the Federal Trade Com- 
mission overj mfair comg eStion to toreign trade as well as to 
domestic; and is in Une wTth a recommendation of that body 
in its report on Cooperation in American Export Trade.* The 
prohibition of unfair competition, it should be observed, relates 
only to methods used against American competitors engaged 
in export trade. The section says, to be sure, competitors 
engaged in export trade, without qualification, yet since export 
trade is defined as trade in goods exported from the United 
States, it is clear that it applies only to American competitors. 
The provisions of section four are applicable not only to associ- 
ations, but also to corporations and individual exporters. 

Section five provides that every acpociation organised imder 

the a rt ^^^^^ ^l< >-wTt H- tVio ffffHnrnl Tra/^p rQnmij«^«; mn a State- 

ment' j^iving p ertain information, including the location of its 
offic^the^games and addresses of all of its officers, stockholders, 
or members, and a copy of its articles of incorporation or associ- 
ation; and that on January first of each year a siipilar statement, 
noting changes, if any, shall be made. Every association ''shall 
also furnish to the commission j^nrh infor mation as the co mnds- 
sion na ^ require as to its organizati on^usi ness, conduct prac- 
tices, cianagement^ _and relation to otherjssociations, corpora- 
tions, partnerships, and individuals." Any association failing 
to comply with these requirements is to be denied the benefits 

» I, p. 380. 


of sections two and three of the act, and to be subject to a fine 
of $100 per day to be recovered by the Attorney General. 

The foregoing provisions are substantially as in the original 
House bill, except for the clause, inserted in the Senate, permit- 
ting the Commission to inquire into the organization, business, 
etc., of export associations. But because of its amendments to 
section two, dealing with the effect of export associations on 
prices or competition in the United States, the Senate deemed 
it advisable to add another paragraph to section five, establish- 
ing administrative machinery for the enforcement of the restric- 
tions imposed in section two. It accordingly provided that 
whenever the Federal Trade Commission had reason to believe 
that the provisos of section two had been violated, it should con- 
duct an investigation; and if upon investigation it concluded 
that the law had been violated '4t may make to such associa- 
tion recommendations for the readjustment of its business, in 
order that it may thereafter maintain its organization and man- 
agement and conduct its business in accordance with law.'' 
If the association fails to comply with the recommendations of 
the Federal Trade Conmiission, the latter is to refer its findings 
and recommendations to the Attorney General for such action 
as he may deem proper. This paragraph was accepted by the 

In the House an attempt had been made to require associa- 
tions desiring to benefit by this act to secure a p>emiit from the 
Federal Trade Conmiission; and to authorize the Commission 
to refuse such permits, and once having issued them to cancel 
them for cause after a hearing. The author of this amendment 
took the position that, if p>ermits were required, and were held 
subject to good behavior, administrative supervision would be 
effective, as it would not be if offenders had to be haled into 
court. The objection was made that this would vest a dangerous 
power in the Commission, and the proposition was rejected by 
a vote of 131-11.* 

A third and final paragraph gave the Commission in the en- 
forcement of these provisions all the powers, where applicable, 
> Cong. Record, June 13, 1917, pp. 3578, 3580, 3584. 


given it in the Trade Commission Act of September 26, 

The advantages of e xport assoc iations have been stated. We 
may now consider some of the p ossible disadvantages. 
/ The c hief objection to the export associatio n s authorized by 
/' the Webb Act is that they may be used as a means of n 
com petition in the domestic ma rket. The Federal Trade Com- 
mission recognized this danger, but expressed the opinion that 
it would be possible through administrative supervision to 
prevent these organizations from being employed in this fashion. 
Others, however, doubt whether this is possible. If all the con- 
cerns in a giveji industry are associated in a common enterprise, 
they will tend to draw together and to pursue a harmonious 
policy with regard to domestic business. The Gary dinners in 
the steel trade were a remarkably effective device in maintaining 
a policy of cooperation that was equivalent to the fixing of 
prices. These dinners were illegal, and they were discontinued. 
However, meetings of these same groups through the medium 
of an export association are not illegal; and it will be exceedingly 
difl5cult, if not impossible, to prevent some understanding being 
arrived at with regard to domestic prices and output. This is 
the more true, since the export associations will naturally fix 
export prices, and an agreement as to the relationship between 
export and domestic prices can readily be effected. Whether 
or not it be true, as alleged by the minority of the House Com- 
mittee on the Judiciary, that the Webb legislation was sought 
"not so much for its value in the foreign trade as for the effect 
it would have on the domestic trade, *' ^ it is hardly to be doubted 
that a restraint of domestic trade will be the practical result in 
some, if not numerous, instances. 

A second-^^si'blilCT'^fiJiiat th^ Webb Act will promote inter- 
national combination. Even prior to the enactment of this 
measure there had been international combinations in steel 
rails, gunpowder, tobacco, thread, and other products, the under- 
lying purpose of these combinations being the maintenance of 
an undisputed position in the domestic market. So far as the 

* House Report no. 50, 6sth Cong., ist sess. 



United States is concerned these arrangements will now be 
i^al, since such restrictions as the Sherman Act imposed on 
restraints of foreign trade are now removed, providing the 
restraint of the export trade does not restrain trade within the 
United States, and does not restrain the export trade of a do- 
mestic competitor of the export association. It is also to be 
anticipated, the provisos in section two to the contrary notwith- 
standing, that the effect of an extension of international com- 
bination will be to reduce the effectiveness of foreign competi- 
tion in this country, that is, where the absence of a protective 
tariff has permitted such competition to exist. 
AnotherH;e§ alt of t he organiz ation of export combinations in, 

the United .^tatt**^ m^y ISi^ H (iin Kpt ^y^pngjnn nf fnrpiyn roml^i|^g- 

ti oiS, m gidei lliat'fDreign buyers may be in a position to bargai n 
eflFerHvpl Y with i^mftrirg^T^ ftvport sales agencie s. The ultimate 
consequences of pitting a single American seller against a single 
foreign buyer in each country, if it should come to that, are not 
easy to foresee, yet it is clear that there exists the possibility 
of prolonged negotiations during the pendency of which the 
export trade will greatly suffer. 
Finally th^rp is danger lest the pursuit of trade by large ■ 

rorld. The^ 

House Committee on the Judiciary, in advocating the passage 
of the Webb bill, declared that export trade, by virtue of the 
methods adopted by other leading countries, had become 
"largely a matter of competition between nations." ^ If the 
Government of the United States is to become a party to this 
international rivalry for trade, it must be in a position to support 
its foreign trade agencies by force of arms, if necessary, with con- 
sequences that may easily be foreseen by any one who has 
learned the lessons of the recent war. It may be, however, that 
it is not necessary for us to run these risks, particularly in view 
of the insistent demand abroad for American products, and in 
view of the immense proportions of our domestic trade. 


^ House Report no. 11 18, 64th Cong., ist sess. 




We come now to the interpretation of the Sherman Anti- 
trust Act by the courts. No attempt is here made to consider 
all the cases involving the Sherman Act that have arisen in the 
courts; only the leading cases that are significant for the pur- 
poses of this book are treated.^ Generally speaking, reference 
is made only to the decisions of the Supreme Court, though in 
two instances — the harvester and the glucose cases — the deci- 
sions of the lower courts are briefly outlined. 


The first case to come before the Supreme Court was United 
States V. E. C. Knight Company. In 1892 the American Sugar 
Refining Company, producing about b^^gej^cent of all the sugar 
refined in the United States, had purchased control of E. C. 
Knight Company and three other independent sugar refining 
companies, producing among them some 33 per cent of the 
coimtry's output of refined sugar.^ The government charged 
that the contracts imder which these purchases had been made 
constituted combinations in restraint of trade; and it brought 
suit to compel their cancellation. Both the Circuit Coin-t ^ and 
the Circuit Court of Appeals ^ ordered the suit dismissed. There- 
upon an appeal was taken to the Supreme Court. 

The Supreme Co\u"t in its decision rendered on January 21, 
1895, sustained the lower courts. "The fundamental question," 

^ For a topical analysis of the leading cases that have arisen under the 
Sherman Act, see the report of the Commissioner of Corporations on Trust 
Laws and Unfair Competition, pp. 70-123. 

' 156 U. S. 1-46 (January 21, 1895). * 60 Fed. Rep. 306. 

» See p. 93. » Ibid., 934. 




said the Goxirt, "is, whether conceding that the existence of a 
monopoly m manufacture is established by the evidence, that 
monopoly can be directly suppressed imder the act of Congress in 
the mode attempted by this bill." The a rgimig nt which was 
advanced by th e gove roment was, to use the Court's summary, 
that "the po wer to control the manufacture of refined suga r is a 
mo nopoly ov CTanecessar y of life, to the en joyment of whiqti by 
a l arge parTof the population of the Um 't^ Sfatp^ int^rytflt** 
com merce is indispensable, and that. t herefor e^__tbp general 
govern ment in the exe rcise of the power to regulate conu nerce 
may repress such m onopoly^directly and set aside the ii^ stru- 
ments ^ ^ch ha y^ created it/* With reference to this argimient . 
the Coiut said : /Doubtless the power to control the manufacture , 
of a given thingJnvolves in a certain sense the control of its dis- V 
position, but thisis a secondary and not the primary sense; and~|\ 
although the exercise of that power may result in bringing the 
operation of commerce into play, it does not control it, and 
afiFects it only incidentally and indirectly. Co mmer ce succeeds 
to manufactur e^ ^d is not a pa rt of it. Th e power to regu late 
comm erce is the po wer to prescribe the rule by whi dixommerce 
shall be^govemed^ 


is a power independent of thejKMyer to 
sup press monop oiy.^^ * \^d by the act of JuIy^^gQo, Congress 
did not attempt "to assert the power to deal with monopoly 
directly as such. . . . What the law struck at was combina- 
tions, contracts, and conspiracies to monopolize trade and com- 
merce among the several States or with foreign nations; but the 
cofUracts and acts of the defendants related exclusively to the acquisi- 
tion of the Philadelphia refineries and the business of sugar refining 
in Pennsylvania^ and bore no direct relation to commerce between the 
States or with foreign nations ^ .... It is true that the bill 
alleged that the products of these refineries were sold and distrib- 
uted among the several States, and that all the companies were 
engaged in trade or commerce with the several States and with 

* However, the power to regulate commerce "may operate in repression of 
monopoly whenever that comes within the rules by which commerce is 
governed or whenever the transaction is itself a monopoly of commerce.'' 

' Italics supplied by the author. 



foreign nations; but this was no more than to say that* trade and 
commerce served manufacture to fulfil its function. . . . 
/ There was nothing in the proofs to indicate any intention to put a 
^ restraint upon trade or commerce y^ and the fact, as we have seen, 
that trade or commerce might be indirectly affected was not 
enough to entitle complainants to a decree." 

A vigorous dissenting opinion was rendered by Justice Harlan, 
who discussed the legal aspects of the case fully. With respect to 
1\ the economic effects of the decision, he held that freedom of 
commercial intercourse embraces the right to buy goods to be 
transported from one state to another, without buyers being 
burdened by unlawful restraints imposed by combinations or 
corporations or individuals; and that if this principle were not 
adhered to, " interstate traffic, so far as it involves the price to be 
paid for articles necessary to the comfort and well-being of the 
people in all the States, may pass under the absolute control of 
overshadowing combinations having financial resources without 
limit and an audacity in the accomplishment of their objects that 
recognizes none of the restraints of moral obligations controlling 
the action of individuals; combinations governed entirely by the 
law of greed and selfishness — so powerful that no single State is 
able to overthrow them and give the required protection to the 
whole coimtry, and so all-pervading that they threaten the 
integrity of our institutions." 

He then went on to inquire (a significant inquiry in the light of 
the subsequent course of events) how the people of the United 
States were to be protected against combinations to fix the price 
' of flour, grain, oil, salt, cotton, and meat — should such be 
organized — except by a national power, a power capable of 
exerting its sovereign authority throughout every part of the 
-territory, and over all the people of the nation. 

The decision of the Supreme Court in the Knight case ap- 

parently limited greatly the power of the federal government to 

deal with trusts and monopolies. That this decision stimulated 

' the formation of trusts in 1897 as soon as industrial conditions 

made their organization by the promoters feasible — thus reali^ 

^ Italics supplied by the author. 


ing the fears of Justice Harlan — ^is undoubted. Yet later deci- 
sions by the Supreme Court have shown that the Sherman Act is 
by no means as ineffective to carry out the purpose for which it 
was designed as the decision in the Knight case would have led 
one to suppose. The explanation, in part at least, is that the 
Km'ght case was not properly presented, and therefore the deci- 
sion of the Supreme Court in this case did not bring out the real 
scope of the law. What the Sherman Act declares illegal is the 
restraint and monopoly of interstate and international com- 
merce, but, as the Supreme Court pointed out, there was nothing i^ 
in the proofs in the Knight case to indicate an intention to put a 
restraint upon trade or commerce. It is hardly necessary to say 
that the Supreme Court in deciding the case was perforce con- 
fined to the record submitted. If the record was inadequate, 
the responsibility for the failure to sustain the government must 
be laid at the door of the Attorney General, and not at that of 
the Supreme Coiurt. 


This decision is important in that it established that the ^ 
Sherman Act appUed to all contracts in restraint of trade, in- 
cluding those between railroad companies. 

On March 15, 1889, a number of railway companies, engaged in 
interstate commerce, formed an association, known as the Trans 
Missouri Freight Association, the purpose of which was stated to 
be the estabUshnifintiindjaiaintenance of reasonable rates, rules, 
and regutat ions on intersta te freight trafl&c south and west of the 
Missouri river. The Sherman Act was subsequently passed on 
July 2, 1890, but the association maintained its existence without 
cha^e. The government th geupon brough t a^iuLin equity to 
have th€Lasociation_di^lved. 

The defendants claimed that th e Sh erman Act did not apgly 
tqniilroads, an'd^lfiareven if it did, the agreement wa^reason- 
abieT^flfl therefore^noflflegal^ Neither of these contentions, 
however, was sustained by the Court. With respect to the first 



1 166 U. S. 290-374 (March 22, 1897). 


it said, "The language of the act includes every ^ contract, combi- 
\/ nation in the form of trust or otherwise, or conspiracy, in re- 
straint of trade or commerce among the several States or with 
foreign nations." It therefore covers common carriers by rail- 
road. In addressing itself to the second question the Court asked 
the meaning of the language in the statute stating that "every 
contract, combination in the form of trust or otherwise, or 
conspiracy, in restraint of trade or commerce among the several 
States, or with foreign nations, is hereby declared to be illegal." 
The defendants argued at great length to show that Congress 
meant to declare illegal only those contracts that were in un- 
reasonable restraint of trade. They pointed out that the common 
law meaning of the term "contracts in restraint of trade" in- 
cluded only those contracts in unreasonable restraint of trade, 
and that terms with a definite meaning at common law should be 
given the same meaning when used in a federal statute. " But," 
cairHliPJ^ip^y^^ *^ |1ip tf "" -f^^Q^ itract in restraint o ffa gde] is no t of 
s uch limited sign ification. Contracts in restraint of trade have 
been known and^^ken of for hundreds of years both in England 
and in this coimtry, and the term includes all kinds of those 
contracts which in fact restrain or may restrain trade. Some of 
such contracts have been held void and imenforceable in the 
courts by reason of their restraint being unreasonable, while 
others have been held valid because they were not of that nature. 
A contract may be in restraint of trade and still be valid at com- 
mon law. Although valid, it is nevertheless a contract in re- 
straint of trade, and would be so described either at common law 
or elsewhere. By the simple use of the term * contract in restraint 
of trade,' all contracts of that nature, whether valid or otherwise, 
would be included, and not alone that kind of contract which 
was invalid and imenforceable as being in imreasonable restraint 
of trade." 
I - Again — the mattCT jsjmpQr^^ant i p^ yjew of the su^eg uent 
' enu nciation of the "rule of reason" — "the argum fint&^which 
have been addressed to us against the inclusion of all contracts 
in restraint of trade, as provided for by the language ofj^he act, 

* The italics are the Court's. 


have been based upon the alleged presumption that Congress, 
notwithstanding the language of the act, could not have intended 
to embrace all contracts, but only such contracts as were in \m- 
reasonable restraint of trade. Under these circimistances we 
are, therefore, asked to hold that the act of Congress excepts 
contracts which are not in unreasonable restraint of trade, and 
which only keep rates up to a reasonable price, notwithstanding 
the language of the act makes no such exception. In other 
words, we are asked to read into the act by way of judicial legis- 
lation an exception that is not placed there by the lawmaking 
branch of the Government, and this is to be done upon the theory 
that the impolicy of such legislation is so clear that it cannot 
be supposed Congress intended the natural import of the lan- 
guage it used. This we cannot and ought not to do. ... If the 
act ought to read as contended for by defendants. Congress is 
the body to amend it and not this court, by a process of judicial 
l^islation wholly unjustifiable." The Court then concl uded 
that the ** direct, j mmedi ate and necessary eflFect [of the agree- 
ment] iTto put X restraint uponj^ade and lcommerce-as de^ 
scribed ln the act,^' and it is therefore illegal. 

A vigorous dissenting^^tnion was rendered by Ju gtice Wlut e, 
and concurred in by Justices Field, Gray, and Shiras. Said 
Justice White, "Is it correct to say that at common law the 
words 'restraint of trade' had a generic signification which 
embraced all contracts which restrained the freedom of trade, 
whether reasonable or unreasonable, and, therefore, that all such 
contracts are within the meaning of the words 'every contract in 
restraint of trade'? I think a brief consideration of the history 
and development of the law on the subject will not only establish 
the inaccuracy of this proposition, but also demonstrate that the 

w ords 'restr aint of trade' embrace on ly contra cts which un- 

- -' • 

re asonably restrain trade, and, therefore, that^ reasonable con- 
tracts, although they , in some measure^ ' restrain trade,' are not 
within t he meaning 5j h£. words. " 

This dissentingj opinion is important, since it subsequently 
became thejax^odiyi opiiuon. TSTthe Standard Oil and the 
Tobacco cases Justice White (then Chief Jxistice) propounded 



the " rule of reason," and established the principle that only 
contracts, etc., in unreasonable restraint of trade are forbidden 
by the Sherman Act. 


This case grew out of an a^eement creating an association to 
fix rates and fares on competitive interstatejxaffic east of ^ li- 
c^o. The agreement, to which some thirt)Mraihoads were par- 
ties, expressly declared that it was entered into only to establish 
and maintaia^Ee asonable r^ tes^ fares^ rulps^ anH rpgiilatini^g on 
state and interetatetraffic, and that the powers conferred on 
thetnaJTagere^oulf^noT'be construed to permit violation of 
the interstate commerce act or any other act that might be 
applicable. The gnypmTnp^t jp^^^it nted a suit in equitv to 
have the agreement declared void, and to enjoin its execution. 

The railfoaHs J Q^ their defense argued ^ that the Joint Traflic 

Association was fiinH^ppnt^illY f]{ffprfint jn nature frnn^ f>ii> 

Trans- Missouri Freight A syKJatj^" ; that the former was not in 
rc ^tfalnt o f trade^ atjll, and was not therefore affected by the 
decision of the court ^ the effect that all restraints, reasonable 
and unreasonable, were illegal; thalthe Sherman Act, as it had 

bee iL const rued in the Trans-Missouri caseT^ gji^o nstitutio nal; 
and thatuie"3ecision in the Trans-Missouri case should be recoit- 
sidered by the Court. In none of these positions were they sus- 
tained by the Supreme Court. The Court proceeded at consider- 
able length to state the interpretation which it had put on the 
Anti-trust Act. It referred to its decision in Hopkins v. United 
States, rendered on the same day.^ ^*ln,^Ho^kins_v^^nikd 
Sta tes ... we say that the statute appUes only to those con- 
tr ^cts whose direct and immedia te eff ect isli restraint upon 
interstate commerce, and that to treat J he act as <m d^ning all 
agrements under which, as a r esult, the c o st of cond ucting an 
interst ate com mercial busines.s may be^increased, would e nlarge 
the application of the act far- beyond the^-fair meaning, of the 
langiiage^used. The effect upon interstate commerce must not 

1 171 U. S. 505-578 (October 24, 1898). 
• 171 U. S. 578-604. 


be indirect or incidental only. An agreement entered into for the 
purpose of promoting the legitimate business of an individual or 
corporation, with no purpose to thereby aflPect or restrain inter- 
state commerce, and which does not directly restrain such 
commerce, is not, as we think, covered by the act, although the 
agreement may indirectly and remotely aflPect that commerce. 
We also repeat what is said in the case above cited, that * the act 
of Congress must have a reasonable construction, or else there 
would scarcely be an agreement or contract among business men 
that could not be said to have, indirectly or remotely, some 
bearing upon interstate commerce, and possibly to restrain it.' 
To suppose, as is assumed by coimsel, that the effect of the deci- 
sion in the Trans-Missouri case is to render illegal most business 
contracts or combinations, however indispensable and necessary 
they may be, because, as they assert, they all restrain trade in 
some remote and indirect degree, is to make a most violent 
assimiption and one not called for or justified by the decision 
mentioned, or by any other decision of this court." ^ 

The Court went on to say that the natural, direct, and imme- 
diate effect of competition is to lower rates, and thereby to 
increase the demand for commodities, the supplying of which 
increases conunerce, and an agreement, whose first and direct 
effect is to prevent this play of competition, restrains instead of 
promoting trade and commerce. Inasmuch as the natural, 
direct, and necessary effect of the provisions of this agreement 
was to prevent any competition whatever between the parties to 
it for the whole time of its existence, it was illegal and void. 

From this opinion Justices White, Gray, and Shiras dissented, 
but they wrote no dissenting opinion. Justice McKenna, who 
had succeeded Justice Field, took no part in the determination 
of the case. The decision, therefore, was 5-3. 


The organization and nature of the cast iron pipe pool (the 
Addyston Pipe and Steel Company) has already been described.^ 

* 171 U. S. 568. ' 175 U. S. 211-248 (December 4, 1899). ' See p. 12. 


The government instituted proceedings against this pool, and 
requested the court to dissolve it and perpetually to enjoin its 
members from transporting cast iron pipe in interstate transpor- 
tation in accordance with the provisions of the agreement. The 
lower court dismissed the petition,* but was reversed by the Cir- 
cuit Court of Appeals.^ Thereupon the Addyston Company 
appealed to the Supreme Court. 

The defense of the Addyston Company was threefold : firs t, 
that the power of Congress to regulate interstate commerce did 
not include the general power to prohibit private contracts 
between citizens, even though such contracts resulted in a direct 
and substantial obstruction to or regulation of that commerce; 
secon^, that even if the combination affected interstate com- 
merce, it was only a reasonable restraint upon a ruinous comj)eti- 
tion among themselves; and, third , that the agreement had no 
direct relation to interstate commerce. 

The Supreme Court, in an unanimous decision, set aside all 
these claims. With respect to the first it held that Congress 
under its grant of power to regulate interstate commerce "may 
e nact such lep^ s^fl^^^n as *^^^^^ dfclf^ V^''^ qnr^|rr>^iKif the per- 
formance of an y contrarf be twee n individuals or^ nrpn^^^'^"^ 
wher e the na tural ^n^j ^ direct effect of su dra^on tract will be, 
when carried out, t o direcUy , and not as a mere incident to other 
and innocent purposes, rpgmi^jf ta any ^^iibRt^nri^ l^t ent inter- 
state commerce. . . . We do not assent to the correctness of the 
proposition that the constitutional guaranty of liberty to the 
individual to enter into private contracts limits the power of 
Congress and prevents it from legislating upon the subject of 
contracts of the class mentioned. ... On the contrary, we 
think the provision regarding the liberty of the citizen is, to 
some extent, limited by the commerce clause of the Constitution, 
and that the power of Congress to regulate interstate commerce 
comprises the right to enact a law prohibiting the citizen from 
entering into those private contracts which directly and sub- 
stantially, and not merely indirectly, remotely, incidentally 

> 78 Fed. Rep. 712. «8s Fed. Rep. 271. 


and collaterally, regulate to a greater or less d^^ree cominerce 
among the States." 

The second oSjection, that the restraint upon interstate 
conunerce, if any, was reasonable received scant consideration 
at the hands of the Court The facts as set forth in the decision 
of the Circuit Court of Appeals "show conclusively," it said, 
" that the effect of the rnmV^n at^^" ^^ ** ^^ pnhar prft pri rfts beyond 
a siuo which was reasonable." 

With r^rd to the claim of the defendants that the combina- 
tion was not a direct restraint on interstate commerce the Court 
said: "the direct effect of the agreement or combination is to 
regulate interstate commerce, and the case is therefore not 
covered by that of United States v. E, C. Knight Company^ 
supra. . . . The direct purpose of the combination in the /TnigA/ 
case was the control of the manufacture of sugar. There was no 
combination or agreement, in terms, regarding the future disposi- 
tion of the manufactiu-ed article; nothing looking to a transaction 
in the nature of interstate commerce. . . . T he c^se w ftR HppHpH 
upon the p rinciple that a combination sim plv to control manu- 
f actu re was not a violation of the act ofCS igg ^ becaufe s uch a 

contract or j^^nibination *1^'^ "^^ Hirprtly rnnfrnl or fiffect 

interstate commerc e^ but that contracts for the ^sale and 
transportiSio^tQ-iathfiiLStates of specific articles were proper 
subjecf TfOT ^r^l ation be cause th^ did lofm paff*of such 

"We think the case now before us involves contracts of the 
nature last above mentioned, not incidentally or collaterally, but 
as a direct and immediate result of the combination engaged in 
by the defendants." 

This was the first decision of the Supreme Coiul since the 
Knight case that related directly to an industrial combination. 
Though it came too late to prevent the establishment of numer- 
ous trusts (the trust movement had already reached its crest), 
nevertheless it strengthened the Sherman Act, and increased the 
power of the government to deal with the trusts already estab- 
lished. In addition, it undoubtedly restrained somewhat the 
further creation of trusts, though it did not discourage their 


formation entirely, as is shown by the fact that quite a number 
were organized even after the rendering of this decision. 


Th:6"National Harrow Company of New Jersey owned patents 
on the manufactm-e of "float spring tooth harrows." It and 
Bement had entered into contracts whereunder Bement, by 
observing certain conditions, was licensed to manufacture and 
sell these implements. The conditions were, in part, that Be- 
ment would maintain the prices fixed in the license, and would 
not engage in the manufacture of any other type of float spring 
tooth harrow than that which he was authorized to manufacture. 
The National Harrow Company claimed that Bement had 
violated the contract; and it brought suit to recover damages, 
and to restrain the future violation thereof. The New York 
Court of Appeals awarded damages, whereupon an appeal was 
taken to the Supreme Court of the United States. 
Bement in his defense argued that the contracts referred to 

• violated the Sherman Act, and were therefore void. This, said 
the Court, would be a good defense, if true. The question before 
the Court was, therefore, did the terms of the license contracts 

t violate the law? In endeavoring to answer this question the 
Court stated that the most material fact to be noted was that the 
agreements concerned articles protected by letters patent. The 
National Harrow Company was the absolute owner of the letters 
patent relating to the float spring tooth harrow business. "It 
was, therefore, the owner of a monopoly recognized by the Con- 
stitution and by the statutes of Congress. An owner of a patent 
has the right to sell it or to keep it; to manufacture the article 
himself or to license others to manufacture it; to sell such article 
himself or to authorize others to sell it. • . . The general rule is 
absolute freedom in the use or sale of rights under the patent 
laws of the United States. The very object of these laws is mo- 
nopoly, and the rule is, with few exceptions, that any conditions 
which are not in their very nature illegal with regard to this kind 

* i86 U. S. 70-95 (May 19, 1902). Justices Harlan, Gray, and White did 
not participate in this decbion. 


of property, imposed by the patentee and agreed to by the 
licensee for the right to manufactiu-e or use or sell the article, will 
be upheld by the courts. The fact that the conditions in the 
contracts keep up the monopoly or fix prices does not render 
them illegal." 

The contention had been made that the contracts did not 
affect interstate commerce. But, said the Court, the contracts 
plainly looked not only to the manufacture of these harrows in 
Michigan, but to their sale throughout the United States; in fact, 
they determined the price at which the article was to be sold 
throughout the coimtry. Interstate commerce being involved, 
were the contracts illegal? The Court answered in the negative. 
" It is true," it said, " that it has been held by this court that the 
act included any restraint of commerce, whether reasonable or 
unreasonable. . . . But that statute clearly does not refer to 
that kind of a restraint of interstate commerce which may arise 
from reasonable and legal conditions imposed upon the assignee 
or licensee of a patent by the owner thereof, restricting the terms 
upon which the article may be used and the price to be demanded 
therefor. Such a construction of the act we have no doubt was 
never contemplated by its framers." 

The Supreme Court threw out an implication that its decision 
might have been different were it established that there was a 
general combination among the dealers in patented harrows to 
regulate the sale and price of such harrows.^ Inasmuch, how- 
ever, as no such combination had been established, its decision 
was based on the legality of the specific contracts presented to it 
for its consideration. 


The Northern Securities Company was incorporated in New 
Jersey in November, 1901, to bring under a conunon control the 
Northern Pacific Railway and the Great Northern Railway, 
two parallel and competing lines in the Northwest. The North- 
em Securities Company was to be a holding company; and it 
shortly acquired, by giving its own stock in exchange, more than 

» Cf. 226 U. S. 48. * 193 U. S. 197-4" (March 14, 1904). 


nine-tenths of the stock of the Northern Pacific and more than 
/ three-fourths of the stock of the Great Northern. The natural 
effect of this arrangement undoubtedly would have been to end 
the competition between these two raiboads; the former stock- 
holders in the two roads, as common stockholders in the holding 
company, would have been interested in preventing competition, 
and they would have chosen as directors men who would cany 
out their wishes in this matter. The government, therefore, 
instituted a suit in equity (March lo, 1902) to have the North- 
em Securities Company dissolved as a combination in restraint 
of interstate commerce, and the railway stocks held by it re- 
turned. It charged that if this combination were not declared 
illegal, the efforts of the national government to preserve to the 
people the benefits of free competition among interstate railways 
would prove unavailing; in fact, that all the railroads of the 
country might be consolidated into one system. 
The Supreme Court by a vote of 5 to 4 sustained the decree 
, of the lower court ordering the Northern Securities Company 
dissolved.^ It said, " No scheme or device could more certainly 
! come within the words of the act — * combination in the fonr of a 
^ trust or otherwise ... in restraint of commerce among the 
several States or with foreign nation,' — or could more effec- 
tively and certainly suppress free competition between the 
constituent companies. This combination is, within the mean- 
ing of the act, a * trust'; but if not, it is a combination in resiraint 
of interstate and international commerce; and that is enough to 
bring it under the condemnation of the act." 

The Court in this connection took occasion to summarize the 
earlier cases arising under the anti-trust act which had received 
consideration at its hands. It pointed out that from these 
earlier decisions certain propositions bearing on the present 
case were plainly deducible. These propositions, stating in a 
nutshell the meaning of the Sherman Act as interpreted up to 
that time, were: 
"That although the act of Congress known as the Anti-Trust 

' The minority filed a long dissenting opinion, written in part by Justice 
White and in part by Justice Holmes. 193 U. S. 364-411. 


Act has no reference to the mere manufacture or production of 
articles or commodities within the limits of the several States, 
it does embrace and declare to be illegal every contract, com- 
bination or conspiracy, in whatever form, of whatever nature, 
and whoever may be parties to it, which directly or necessarily 
operates in restraint of trade or commerce among the several 
States or with foreign nations; 

" That the act is not limited to restraints of interstate and 
international trade or conmierce that are unreasonable in their ^ 
nature, but embraces all direct restraifUs imposed by any combi- I 
nation, conspiracy or m onopo ly upon such trade or conmierce; 

'* That railroad carriers engaged in interstate or international 
trade or commerce are embraced by the act; v 

"That combinations even among private manufacturers or 
dealers whereby interstate or international commerce is restrained i 
are equally embraced by the act; 

" That Congress has the power to establish rules by which 
interstate and international commerce shall be governed, and, 
by the Anti-Trust Act, has prescribed the rule of free competi- 
tion among those engaged in such commerce; 

" That every combination or conspiracy which would extinguish 
competition between otherwise competing railroads engaged in 
interstate trade or commerce^ and wiiich would in that way re- 
strain such trade or commerce, is made illegal by the act; 

" That the natural effect of competition is to increase com- 
merce, and an agreement whose direct effect is to prevent this 
play of competition restrains instead of promotes trade and 

" That to vitiate a combination, such as the act of Congress 
condemns, it need not be shown that the combination, in fact, 
results or will result in a total suppression of trade or in a com- 
plete monopoly, but it is only essential to show that by its 
necessary operation it tends to restrain interstate or interna- 
tional trade or commerce or tends to create a monopoly in such 
trade or commerce and to deprive the public of the advantages 
that flow from free competition; 

" That the constitutional guarantee of Uberty of contract does 


not prevent Congress from prescribing the rule of free competi- 
tion for those engaged in interstate and international commerce. " ' 
The recognition of these principles, said the Court, must lead 
us to grant the relief asked for by the government unless the 
special objections raised by the defendants to the application oi 
the Sherman Act to the present case are substantial. These 
objections in part were: the Northern jecurities Compa ny was 
a state c orporation authorized to acquire stock, and th eenforce- 
ment ot th e bherman Act aigainsL it would be an unauthorized 
interfere nce by the national governm ent with th*^ intgmal com- 
merc e of the st ates cr ating it and its subsidiary railway com- 
pames; that so far asthe power of Congress was concerned, 
citizens or state corporations might dispose of theif property 
and invest their money m any wa^Tt hey^choSP; and that the 

eiKorcement of the act would lead to business disaster, and 
widespread financial ruin. All these objections were considered 
and dismissed by the Court. The Anti-trust Act, it said, has 
been construed as forbidding any combination which by its 
necessary operation destroys or restricts free competition among 
those engaged in interstate commerce; in other words, that to 
destroy or restrict free competition in interstate commerce was 
to restrain such commerce. Simply, heranse a state allows con- 
solidation, it do es not follow that t he stockholders of two or 
mor e""slate railry d corporations, having c^npeting lines and 
engaged in interstate commerce^could^ lawfully combine and 
form a distinct corporation to hold the stock of the constituent 
corporations, and, by destroying competition between them, in 
violatio n^ of the act^ Congress, restrain commerce among the 
states and with foreign nations. **No State can, byjierely 
creatin g a corporation, or in any o ther jmQd£i_D roject i tsaujor- 
ity into other States, and across the contin e nt, so as to ^prevent 
Cong ress f rom^xertm g_Uie.jlow er it po ssesses under the Con- 
stituti on over i nterstate and intprnati'on^^ ^^"^menr^^ so as to 
exempt its corporation en^ged in interstate commerce from 
obedience to anyTiile lawfully established by Congress for such 
commerce. . . . Every corporation created by a State is nec- 

* 193 U. S. 331-332. Italics are the Court's. 


essarily subject to the supreme law of the land; ..." and ''the 
court may make any order necessary to bring about the dis- 
solution or snppressina of an illegal combination that restrains 
interstate commerce. ..." The affirmance of the judgment 
below will mean that no device, "however skilfully such device 
may have been contrived, and no combination, by whomsoever 
formed, is beyond the reach of the supreme law of the land, if 
such device or combination by its operation directly restrains 
commerce among the States or with foreign nations in violation 
of the act of Congress. " 

The Supreme Coiul therefore sustained the decree of the lower 
court. The Northern Securities Company was enjoined from 
voting the stock of the Northern Pacific Railway Company and 
the Great Northern Railway Company, and the railroad com- 
panies were enjoined from paying any dividends on such stock 
to the Northern Securities Company. But the Northern Securi- 
ties Company might return to the Northern Pacific and the 
Great Northern, respectively, the stock of these roads held by 
it; or it might transfer the stocks of these railroad companies 
to its own shareholders.^ 

This decision was of capital importance in the interpretation X 
of the Sherman Act, since it was the first instance in which a 
holding compa ny was attacked as a combination in restraint of 
traSe. 'Sut it was of equal importance in its influence upon 
economic conditions. It gave a decided set-back to the use of 
the holding company device in the organization of trusts; and it 
greatly encouraged the federal government in instituting pro- 
ceedings against them. 


This was a bill in equity against Swift and Company, Armour 
and Company, Cudahy Packing Company, Nelson Morris and 
Company, Schwarzchild and Sulzberger, Hammond Packing 

> For a later dedsbn of the Supreme Court approving the plan of dissolu- 
tion agreed upon, see Harriman r. Northern Securities Company, 197 U. S. 

« 196 U. S. 375-402 (January 30, 1905). 


Company, and G. H. Hammond Company, controlling about 
60 per cent of the total trade in fresh meats. * The bill charged a 
combination^fju425[^J5^^^ throughout 

the United States not to bid against each other in the live stock 
markets oitiie different states, except perfunctorily and with- 
out good faith, thus seouing the live stock at less than com- 
petitive prices; a combination to bid up prices for a few days in 
order to induce the cattle men to send their stock to the stock- 
yards; to fix the prices at which they would sell to dealers 
throughout the states, these prices being effected by secret 
periodical meetings and maintained by a restriction of ship- 
ments, by the establishment of a uniform rule for the giving of 
credit, and by the keeping of a black list of delinquents; a com- 
bination to make imiform and improper charges for cartage; 
and, finally, to get less than lawful rates from the railroads to 
the exclusion of shippers. It was further charged that because 
of the consequent inability of competitors to continue in com- 
merce, the defendants had monopolized the commerce in live 
stock and fresh meats among the states. The_gQvernment 
prayed for an inju nction ^ of the mos t comprehcDsive sort. The 
Circui t-Courruphelfl the gny emn^enf ; and issued an injunction 
restraining the defendants from entering into a combination, 
in violation of the Sherman Act, and from emplo)dng any of the 
aforesaid devices, or any other method or device, the purpose 
or effect of which was to restrain commerce.^ The defendants 
thereupon appealed to the Supreme Coiu't, but without success. 
The Court unanimously held that an illegal combination had 
been shown; and that the effect of the combination on inter- 
state commerce was direct, and not accidental, secondary, or 
remote. The case was to be distinguished from United States 
V, E. C. Knight Company. In the Knight case the subject- 
matter of the combination was manufactiu'e, and the direct 
object was monopoly within a state. However likely it was that 
monopoly of commerce among the states in sugar would follow 
from the agreement entered into, such was not a necessary 

* Petition in United States v. Swift and Company, pp. i, 4. 
« The injunction is quoted in 196 U. S. 393. 


consequence, nor a primary end. But in this case the - ^ybjecj :- 
mat ter was sales, and the very point of the combination was to 
res&ain and monopolize commerce among the states in respect 
of such sales. The Supreme Court therefore aflirmed the injunc- 
tion, except that it ordered the elimination therefrom of the 
words "or by any other method or device, the purpose and 
eflfect of which is to restrain commerce as aforesaid." The '] 
specific devices mentioned in the bill stood prohibited, but the , 

Court felt that it would be quite imjust to issue a general in- \ 
junction against all possible breaches of the law, since that 
would put the whole conduct of the defendant's business at the y 
peril of a simimons for contempt. — ' 


Mr. Loewe, a manufacturer of hats at Danbury, Connecticut, 
and engaged in interstate commerce in the sale of his hats, 
operated an open shop. The United Hatters of North America, a 
labor organization, forming a part of the American Federation 
of Labor, demanded that Mr. Loewe employ union labor ex- 
clusively, that is, convert his plant into a closed shop. Upon ! 
his refusal the United Hatters went on strike, and instituted a 
boycott against the hats manufactured by Mr. Loewe. Finding 
it difficult to dispose of his product in interstate commerce, Mr. 
Loewe brought an action against Mr. Lawlor and the United 
Hatters of North America for the recovery of three-fold damages 
under section seven of the Sherman Act. 

The question before the Court was whether upon the facts 
averred and admitted an action could be maintained. The 
Court in an unanimous decision held that it could. The Sher- 
man Act, it said, "prohibits any combination whatever to secure 
action which essentially obstructs the free flow of commerce 
between the States, or restricts, in that regard, the liberty of a 
trader to engage in business," and the combination described 
was in restraint of trade or commerce among the several states 
in the sense in which those words were used in the act. The 

* 208 U. S. 274-309 (February 3, 1908). 


Supreme Court therefore remanded the cause to the lower 
court to determine the truth of the facts alleged and the amount 
of the damages to be awarded. 



The government brought suit on November 15, 1906, against 
the Standard Oil Company of New Jersey (the holding com- 
pany), seventy subsidiary corporations, and seven individual 
defendants, charging violation of the Sherman Act The 
Circuit Court in an unanimous decision on November 20, 
1909, held that the Standard Oil Company was a combination in 
restraint of trade in violation of section one and a monopoly 
in violation of section two of the anti-trust act, but it ordered 
the bill against thirty-three of the corporate defendants dis- 
missed, since it had not been proven that they were engaged in 
the operation of the combination. The Circuit Court^ thereupon 
issued a decree,* which provided (substantially in the Court's 

Section 5. That the Standard Oil Company, its directors, 
officers, agents, servants, and employees, are enjoined from 
voting any of the stock in any of the thirty-seven companies* 
named in section two of the decree, and from exercising or 
attempting to exercise any control or influence over the acts 
of these subsidiary companies by virtue of its holding of their 
stock. And the subsidiary companies, their officers, etc., are 
enjoined from paying any dividends to the Standard Oil Com- 
pany of New Jersey, and from permitting the latter to vote any 
stock in, or direct the policy of any of them. "But the defend- 
ants are not prohibited by this decree from distributing ratably 
to the shareholders of the principal company the shares to which 
they are equitably entitled in the stocks of the defendant cor- 
porations that are parties to the combination." • 

Section 6. That the defendants named in section two of the 
decree, their officers, etc., are enjoined from continuing the com- 

' 221 U. S. i-io6 (May 15, 191 1). '173 Fed. Rep. 197-200. 

* Italics supplied by the author. 


bination adjudged illegal, and from entering into any like com- 
bination or conspiracy, the effect of which is, or will be, to re- 
strain commerce in petroleimi or its products among the States, 
etc., or to prolong the imlawful monopoly of such commerce 
possessed by defendants, either (i) by the use of liquidating 
certificates; by placing the control of any of said corporations 
in a trustee; by causing its stock or property to be held by others 
than its equitable owners; or by any similar device; or (2) by 
making any express or implied agreement together, like that 
adjudged Qlegal, relative to the control or management of any 
of said corporations, or the price or terms of purchase, or of 
sale, or the rates of transportation, of petroleum or its products 
in interstate or international commerce, or relative to the quan- 
tities thereof purchased, sold, transported, or manufactured 
by any of said corporations, which will have a like effect in 
restraint of commerce to that of the combination the operation 
of which is, hereby enjoined. 

Section 7. The defendants named in section two are enjoined, 
until the discontinuance of the operation of the illegal combina- 
tion, from engaging in interstate commerce. 

Section 9. This decree shall take effect thirty days after its 
entry if no appeal is taken from it; and if an appeal is taken, it 
shall take effect, imless reversed or modified, within thirty days 
after tl^e final decision of the Supreme Court upon appeal. 

The Standard Oil Company of New Jersey, thirty-three of 
the thirty-seven other corporate defendants, and the seven in- 
dividual defendants at once appealed to the Supreme Court. 
The case was argued before the Coiul in March, 1910, but on 
account of the illness of Justice Moody, and the death of Jus- 
tice Brewer in the latter part of March, the case was reargued 
in January, 191 1. The decision of the Court was rendered on 
Mayis, 1911. ^ •, 

The Supreme Court in approaching the problem raised by 
the case pointed out that the views of the two parties to the 
suit as to the meaning of the Sherman Act and as to the facts 
were as '* wide apart as the poles." But since both agreed that 
the controversy in its every aspect was controlled by a correct 


conception of the meaning of sections one and two of the Sher- 
man Act, the Court proposed to consider first of all the text 
of these sections of the act, and its meaning in the light of the 
conmion law and the law of the country at the time of its 

The first section of the Sherman Act deals with restraint of 
trade, and the second with attempts to monopolize, and monopo- 
lization. The Court, guided by the principle that words which 
had a well-known meaning at common law or in the law of this 
coimtry were presumed to have been used in that sense in a 
statute unless the context compelled to the contrary, reviewed 
briefly certain indisputable propositions already established by 
the English and American law prior to the enactment of the 
Sherman Act. It then concluded with respect to the first sec- 
tion: That the context manifests that the statute was drawn 
in the light of the existing practical conception of the law of 
restraint of trade; that in view of the many new forms of con- 
tracts and combinations which were being evolved from exist- 
ing economic conditions it was deemed essential by an all- 
embracing enumeration to make sure that no form of contract 
or combination by which an undue restraint of interstate or 
foreign commerce was brought about could save such restraint 
from condemnation; that the statute under this view evidenced 
the intent not to restrain the right to make contracts, whether 
resulting from combination or otherwise, which did not unduly 
restrain interstate or foreign commerce; that as the contracts 
or acts embraced in the provision were not expressly defined, 
it inevitably followed that the provision necessarily called for 
the exercise of judgment, which required that some standard 
should be resorted to for the purpose of determining whether 
the prohibitions contained in the statute had or had not in any 
given case been violated; that, thus not specifjdng, but indubit- 
ably contemplating and requiring a standard, it was intended 
that the standard of reason ^ which had been applied at the com- 
mon law and in this country in dealing with subjects of the 
character embraced by the statute, was intended to be the 

» Italics supplied by the author. 


measure used for the purpose of determining whether in a given 
case a particular act had or had not brought about the wrong 
against which the statute provided. 

With respect to the second section a consideration of the text 
served to estabUsh, said the Court, that this section was intended 
to supplement the first, and to make sure that by no possible 
guise could the pubUc policy embodied in the first section be 
frustrated or evaded. The words " to monopolize" reach every 
act bringing about the prohibited results. The ambiguity, if 
any, is involved in determining what is intended by monopolize. 
But this ambiguity is readily dispelled, said the Court, in the 
light of the previous history of the law of restraint of trade to 
which we have referred, and the indication which it gives of the 
practical evolution by which monopoly and the acts which pro- 
duce the same result as monopoly, that is, an undue restraint 
of the course of trade, all came to be spoken of as restraint of 
trade. In other words, hfl.v\pg hy tK^ firct g^tionjorbidden all 
means of monopolizi ng tra de ^that is, unduly restrainin g it by 
means^Sfeyerycon tract, combination, etc., the second^ section 
seeks ^if [>ossible, t " omake Ae proh i bitions of the ^ct all the m ore 
complete and perfect by embracing all attempts to re ach the 
end prohibi ted by the first^ection^ that is,^ restra ints o f trade, 
by any attwnpt to monopolize, even though the acts by which 
such results are attempted to be brought about be not embraced 
within the general enumeration of the first section. And, of 
course, wh en the second section is thus harmonized with and 

made, as it was intended to be, the complement of thejirst, 

« »- — - ■- ■ — - " " - -- 

it becom ^ obvious that the criterion to be re sorted to iji any 
given case fo r the purpose of ascertaining w hethe r violations of 
the sectioiThave been co mmi tted, is the rulejf reasgp ^ guided 
by the ^tablished law and by the plain duty to enforce the pro- 
hibitions of the act, and thus the public policy which its restric- 
tions were obviously enacted to subserve. 

While the meaning of sections one and two thus seemed clear 
to the Court, it proposed, before applying its interpretation, to 
consider the contentions of the plaintiff and defendants, which 

* Italics supplied by the author. 


would give a different significance to the act than that adopted 
by the Court. 

The fundamental contention of the government was that the 
language of the statute embraced every contract, combination, 
etc., in restraint of trade, and hence left no room for judgment. 
It held further that this was the interpretation that had been 
placed upon the act by the Court, notably in the freight associa- 
tion cases. In reply the Court said that it was undoubtedly 
true that in the opinion in each of the freight association cases 
general language was made use of, which, when separated from 
its context, would justify the conclusion that it was decided 
that reason could not be resorted to for the purpose of determin- 
ing whether the acts complained of were within the statute. Yet 
it was also true that the nature and character of the contract 
or agreement in each case was fully referred to, and suggestions 
as to their unreasonableness pointed out, in order to indicate 
that they were within the prohibitions of the statute. That the 
cases reUed upon did not, when rightly construed, sustain the 
doctrine contended for was established, it held, by all of the 
numerous decisions of this court which have applied and en- 
forced the anti-trust act, since they ail in the very nature of 
things rest upon the premise that reason was the guide by which 
the provisions of the act were in every case interpreted. Indeed 
in Hopkins v. United States, decided after the Trans-Missouri 
Freight Association case, but before the Joint Traffic Associa- 
tion case, the Court said, " to treat as condemned by the act all 
agreements under which, as a result, the cost of conducting an 
interstate commercial business may be increased would enlarge 
the application of the act far beyond the fair meaning of the 
language used. There must be some direct and immediate 
effect upon interstate commerce in order to come within the 
act." And "if the criterion by which it is to be determined in 
all cases whether every contract, combination, etc., is a restraint 
of trade within the intendment of the law, is the direct or indirect 
effect of the acts involved, then of course the rule of reason be- 
comes the guide, and the construction which we have given the 
statute, instead of being refuted by the cases relied upon, is by 


those cases demonstrated to be correct." In other words, the 
rule of reason and the result of the test as to direct and indirect 
in their ultimate aspect come to one and the same thing. But 
''in order not in the slightest degree to be wanting in frankness, 
we say that in so far, however, as by separating the general 
language used in the opinions in the Freight Association and Joint 
Traffic cases from the context and the subject and parties with 
which the cases were concerned, it may be conceived that the 
language referred to conflicts with the construction which we 
give the statute, they are necessarily now limited and qualified." ^ 

The contentions o f the defendants w ere fimdamentally: 
first, that the act could not be constitutionally a pplied to the 
case before the cou rt, smce this would result in extending the 
power of Congress over me reougsdons ot produc tion within 
the states; and, second, that the act could not be applied without 
jmp airmg rights o f property and destr oying the freedom o f con- 
tract or trad e, which were protected by the constitutional 
guaranty of due process of law. The fir st contention , said the 
Court, is forecl osed by the nimierous decision s since the Knight 
case; and the s econd assimies that re ason may not be resorted 
to in applyin g the statute, and^Sit therefore the right to con- 
tract is imrea^ nably restri cted. But since we have pointed out 
that reason may be resorted to, the proposition based on an un- 
soimd as sumptio n fallsto^ie ground. 

The meaning oTthe Sherman Act having been set forth, what 
was the status imder this act of the Standard Oil Company? 
The established facts, said the Court, demonstrate the illegality 
of the combination before us; the S tandard O ilMCompan^js^not 
only a combin ation in restraint of trade, bu t a^ombination in 
unreasona ble restraint of trade. It turned next, therefore, to 
a consideration of the remedy to be applied. 

Ordinarily, said the Court, adequate relief against acts done 
in violation of the statute would result from restraining the doing 
of such acts in the future. But in a case like this where there 
exists not only a continued attempt to nionopolize, but also a 
monopolization, the duty to enforce the statute requires the 

1 221 U. S. 67-68. 


application of broader remedies^--¥he...^ential remedies are: 
first, to forbid th e dom^ in th e future of a cts vioEl iye of the 
statute; ^n^, «^^^nd4 ^e ^ertiSi oi such m^^^ure gi relief as 
will effectua Uy dissolve_ th^~iIl£gal combination. The Court 
then proceeded as a means of determming the relief to be granted 
to consider the relief afforded by the Circuit Court. The decree 
of the Circuit Court is given on page 406, and need not be 
repeated here. The Supreme Court affirmed this decree of the 
lower court except in certain particulars. It held, first, that the 
interests inyobM> tl w ti t - ^t Q^vB St that tfie def^ dants should be 
allowed sixj aontho t OLX^ rry out the^ d ecreepmStead^ only 
thirty days. Second, it. thought that section seven of the decree, 
forbidding interstate commerce to the New Jersey corporaticm 
and its subsidiary companies until the dissolution of the com- 
bination, might work serious injury to the public, and should 
not have been awarded. And, finally, the Supreme Court 
construed section six of the decree as restraining the stockholders 
or the corporations, after the dissolution of the combination, 
from, by any device whatever, recreating, directly or indirectly, 
the illegal combination, but not as depriving them of the power 
to make normal and lawful contracts or agreements. For ex- 
ample, after the dissolution some of the separate pipe-line com- 
panies might desire to combine so as to form a continuous line. 
Such action, the Court held, would not be repugnant to the act, 
yet it might be deemed to have been restrained by the decree of 
the court below. Section six was therefore modified to permit 
such lawful arrangements. As thus modified the decree was 
affirmed, and the court below was allowed to retain jurisdiction 
to the extent necessary to compel compliance in every respect 
with its decree.^ 

The decision that the Standard OU Company was unlawful 
was a unanimous one, but Justice Harlan filed a separate opin- 
ion dissenting from certain parts of the decision, particularly the 
enimdation of the "rule of reason." Relentlessly he dted from 

*The decree of the Circuit Court, modified to meet the views of the 
Supreme Court, was filed July 29, 191 1; and may be found in Decrees 
and Judgments in Federal Anti-TruFt Cases, pp. 136-144. 


former decisions of the Court, particularly the Trans-Missouri 
Freight case and the Joint Traffic case, passages indicating that 
the Court had substantially modified its former position.* The 
Court, said Justice Harlan, now says to those who object to 
all legislative prohibition of contracts, combinations, and trusts 
in restraint of interstate commerce, "you may now restrain such 
commerce, provided you are reasonable about it; only take care 
that the restraint is not imdue." ^ As the result of this upsetting 
of the long-settled interpretation of the act we will doubtless 
have, he said, in cases without mmiber, the constantly recurring 
inquiry — difficult to solve by proofs — whether the particular con- 
tract, combination, or trust involved in each case is or is not an 
"xmreasonable" or "imdue" restraint of trade. But more 
dangerous in his opinion was the fact that the decision of the 
Court in this case represented judicial legislation, — ^a usurpation 
of the constitutional functions of the legislative branch of the 
government Justice Harlan held that the Court had done in 
this case exactly what in the Trans-Missouri Freight case it had 
refused to do; that in the Trans-Missouri Freight case the Coiu't 
had held that the act prohibited every contract, etc., in restraint 
of trade, and that to read into the act the word "imreasonable" 
would be an act of judicial legislation; and this they could not 
and ought not to do. The Supreme Court, therefore, by 
interpretation of a statute has changed, he said, the public policy 
adopted by Congress, — a proceeding that might well cause 
some alarm for the integrity of our institutions.* 



The suit against the tobacco trust was brought on July 10, 
1907. The defendants were twenty-nine individuals, sixty-five 

* In speaking of the Standard Oil and the Tobacco cases Judge Peter 
Grosscup said, " It would be mere hypocrisy to say that the court has not 
turned upon itself. What the court fourteen years ago said was not in the 
act the court now say is in the act." (North American Review, 194, p. 3.) 

* Italics are Justice Harlan's. * 221 U. S. 83, 105. 
'Italics supplied by the author. * Ibid., 106-193 (May 29, 191 1.) 


American corporations, and two English corporations. For 
convenience the corporate defendants were classified by the 
upper court as follows: the American Tobacco Company (a 
corporation organized in New Jersey in 1904 to merge the prop- 
erties formerly controlled through the Consolidated Tobacco 
Company, a holding company) was called the primary defend- 
ant; the American Snuff Company, the American Cigar Com- 
pany, the American Stogie Company, the MacAndrews and 
Forbes Company, and the Conley Foil Company were called the 
accessory defendants; the remaining fifty-nine American cor- 
porations, the subsidiary defendants; and the Imperial Tobacco 
Company and the British-American Tobacco Company, the 
English corporations. The bill charged that the defendants, 
individual and corporate, constituted a combination in restraint 
of interstate and foreign trade in tobacco in violation of section 
one of the Sherman Act, and a monopolization of such trade in 
violation of section two. The decision of the Circuit Court, 
rendered on November 7, 1908, was favorable to the government, 
though one of the four judges dissented.* The decree of the 
Court was filed on December 15, 1908.^ Inasmuch as the Su- 
preme Court in subsequently awarding its decree did not model 
its action upon that of the Circuit Court, the decree of the lower 
court need not be outlined here. It suffices to say that the Cir- 
cuit Court dismissed the petition as to the individual defendants, 
the English corporations, the United Cigar Stores Company, and 
three other of the subsidiary corporations, but granted relief 
with respect to the remaining defendants. From the decree both 
parties appealed to the Supreme Court, the government because 
the petition had been dismissed in part and because the decree 
awarded did not satisfy it, and the defendants because the peti- 
tion had not been dismissed as to all of the defendants. The 
decision of the Supreme Coiu't was rendered on May 29, 1911, 
the pronouncement being delayed by the same causes that made 
a reargument of the Standard Oil case advisable. 

The Supreme Court found its task much simplified by the 
anal)^is and review of the act made in the Standard Oil case. 

^ 164 Fed. Rep. 700-728. « 164 Fed. Rep. 1024-1025. 


Its investigation in the tobacco case proceeded along three lines: 
first, a review of the undisputed facts; second, the construction 
and application of the act; and, third, the remedy to be appKed. 
The facts as to the tobacco trust are found in Chapter VII, 
and we may therefore proceed at once to the second branch 
of the Court's inquiry, the interpretation of the Sherman 

The Court pointed out first of all the significance of the case 
before it. It said, "If the Anti- trust Act is applicable to the 
entire situation here presented and is adequate to afford com- 
plete relief for the evils which the United States insists that 
situation presents it can only be because that law will be given a 
more comprehensive application than has been afl^ed to it in any 
previous decision. This will be the case because the undisputed 
facts as we have stated them involve questions as to the opera- 
tion of the Anti-trust Act not hitherto presented in any case." 
It then pointed out why this was so. Even if the ownership of 
stock by the American Tobacco Company in the accessory and 
subsidiary companies and the ownership of stock in any of these 
companies among themselves were held, as in the Standard Oil 
case, to be a violation of the act, the question would remain 
whether the American Tobacco Company, and the five accessory 
defendants, by virtue of the power that remained to them, would 
still be in existence in violation of the Shennan Act. Again, the 
question woiJd remain whether those companies whose power 
arose, not from combination, but from the acquisition and owner- 
ship of property, were amenable to the prohibitions of the act. 
Further, the question would remain whether certain companies 
no longer in themselves a restraint of trade or a monopolization, 
when once they had been bereft of the power resulting from 
stock ownership, should nevertheless be restrained because of 
their intimate connection with other defendants. 

The Court then proceeded to apply the act as formerly inter- 
preted to the case before it. By the interpretation which we 
have put on the act, said the Court, all the difficulties suggested 
by the form in which the assailed transactions are clothed be- 
come of no moment. This follows because the first and second 


sections of the Sherman law, when taken together, embrace every 

conceivable act which could possibly come within the spirit or 
purpose of the prohibitions of the law, without regard to the garb 
in which such acts are clothed; that is to say, the public policy 
which that statute manifests can not be frustrated by resort to 
any disguise or subterfuge of form. 

Considering, then, the undisputed facts, it only remains, said 
the Court, to determine whether they establish that the acts, 
contracts, agreements, and combinations which were assailed 
were of such a wrongful character as to bring them within the 
prohibitions of the law. That they were, the imdisputed facts 
made abundantly clear. The wrongful purpose and the illegaUty 
of the tobacco combination is overwhelmingly established, said 
by tne Court, by the following considerations: a. By the fact 
that the very first organization or combination was impelled by a 
previously existing fierce trade war, evidently inspired by one or 
more of the minds which brought about and became parties to 
that combination, b. Because, immediately after that combina- 
tion, the acts which ensued justify the inference that the inten- 
tion existed to use the power of the combination as a vantage 
groimd to further monopolize the trade in tobacco by means of 
trade conflicts designed to injure others, either by driving com- 
petitors out of the business or compelling them to become parties 
to a combination — a purpose whose execution was illustrated by 
the plug war, by the snuff war, and by the conflict which imme- 
diately followed the entry of the combination into England and 
the division of the world's business by the two foreign contracts 
which ensued, c. By the ever-present manifestation which is 
exhibited of a conscious wrongdoing by the form in which the 
various transactions were embodied from the beginning, ever 
changing but ever in substance the same. d. By the gradual 
absorption of control over all the elements essential to the 
successful manufacture of tobacco products, and by placing such 
control in the hands of seemingly independent corporations 
serving as perpetual barriers to the entry of others into the 
tobacco trade, e. By persistent expenditure of millions up>on 
millions of dollars in buying out plants, not for the purpose of 


utUizing them, but in order to close them up and render them 
useless for the piuposes of trade, f . By the constantly recurring 
stipulations, by which numbers of persons, whether manufac- 
turers, stockholders, or employees, were required to bind them- 
selves, generally for long periods, not to compete in the future. 
" Indeed, when the results of the undisputed proof which we have 
stated are fully apprehended, and the wrongful acts which they 
exhibit are considered, there comes inevitably to the mind the 
conviction that it was the danger which it was deemed would 
arise to individual liberty and the public well-being from acts 
like those which this record exhibits, which led the legislative 
mind to conceive and to enact the Anti-trust Act, considerations 
which also serve to clearly demonstrate that the combination 
here assailed is within the law as to leave no doubt that it is our 
plain duty to apply its prohibitions." 

The application of remedies involves greater difficulties, 
held the Court, than any case interpreting the Anti-trust Act 
hitherto decided. This is true, first, because a mere decree for- 
bidding stock ownership by one part of the combination in 
another part would not aflFord adequate relief, since there would 
still remain different ingredients of the combination, still able, 
by the character of their organization, to continue the wrongful 
situation. Second, .because the subtle devices resorted to were of 
such a character as to make it difficult, if not impossible, to 
restore in their entirety the original lawful conditions. Third, 
because the affair was so involved that there was danger of 
injuring the public, and possibly of perpetuating the illegal 
condition. The Court said that it might at once issue a perma- 
nent injunction restraining the combination as a universality 
and all the individuals and corporations which formed a part of 
it from continuing to engage in interstate commerce until the 
illegal situation was cured, or it might direct the appointment 
of a receiver to take charge of the assets of the combination to 
prevent a continued violation of the law, and to work out by a 
sale of the property of the combination a condition not repug- 
nant to the act. But it did not order either of these remedies. 
To stay the interstate transportation by defendants of tobacco 



and its products might inflict infinite injury on the public by 
leading to the stoppage of supply and a great enhancement of 
prices; and the resort to a receivership might not only do grievous 
injury to the public, but also cause widespread loss to many 
innocent people. It, therefore, having held that the petition 
should not have been dismissed against the individual defend- 
ants, the United Cigar Stores Company, and the foreign corpora- 
tions, decreed as follows: (i) That the combination in and of it- 
self, as well as each and all of the elements composing it, whether 
corporate or individual, whether considered collectively or 
separately, be decreed to be in restraint of trade and an attempt 
to monopolize and a monopolization. (2) That the court below, 
in order to give effective force to our decree, be directed to hear 
the parties for the purpose of determining upon some plan of 
dissolving the combination and of recreating, out of the elements 
now composing it, a new condition which shall be honestly in 
harmony with and not repugnant to the law. (3) That for the 
accomplishment of these piuposes a period of six months is 
allowed, with leave, however, to the court below to extend such 
period to a further time not to exceed sixty days. (4) That in the 
event, before the expiration of the period thus fixed, a condition 
of disintegration in harmony with the law is not brought about, 
it shall be the duty of the court, either by way of an injimction 
restraining the movement of the products of the combination in 
the channels of interstate or foreign commerce or by the aj^xmit- 
ment of a receiver, to give effect to the requirements of the stat- 
ute. Meanwhile the defendants should be restrained from doing 
any act which might enlarge the power of the combination.^ 

Justice Harlan, as in the Standard OD case, assented in part 
and dissented in part. He agreed most thoroughly that the 
American Tobacco Company and its parts should be decreed to 
be in restraint of interstate trade and a monopolization. But he 
objected to sending the case back to the Circuit Court in order 
that a new condition might be "recreated" that would not be in 
\iolation of the law; there was enough evidence in the record, 
he said, to enable the Supreme Court to formulate q)ecific direc- 
* For an account of the final plan of dissolution, see pp. 452 seq. 


tions as to what the decree should contain. He objected also to 
the reaffirmance of the "rule of reason." "Congress, with full 
and exclusive power over the whole subject, has signified its 
purpose to forbid every restraint of interstate trade, in whatever 
form, or to whatever extent, but the court has assumed to insert 
in the act, by construction merely, words which make Congress 
say that it means only to prohibit the 'imdue' restraint of trade. 
K I do not misapprehend the opinion just delivered, the coiu't 
insists that what was said in the opinion in the Standard Oil Case, 
was in accordance with our previous decisions in the Trans- 
Missouri and Joint Traffic cases, ... if we resort to reason. 
This statement surprises me quite as much as would a statement 
that black was white or white was black. ... By every con- 
ceivable form of expression, the majority, in the Trans-Missouri 
and Joint Traffic cases, adjudged that the act of Congress did 
not allow restraint of interstate trade to any extent or in any 
form, and three times it expressly rejected the theory, which had 
been persistently advanced, that the act should be construed as 
if it had in it the word 'unreasonable' or 'undue.' But now the 
court, in accordance with what it denominates the 'rule of 
reason,' in effect inserts in the act the word 'undue,' which means 
the same as 'imreasonable,' and thereby makes Congress say 
what it did not say, what, as I think, it plainly did not intend to 
say and what, since the passage of the act, it has explicitly re- 
fused to say. It has steadily refused to amend the act so as to 
tolerate a restraint of interstate commerce even where such 
restraint could be said to be 'reasonable' or 'due.' In short, 
the court now, by judicial legislation, in e£Fect amends an act 
of Congress relating to a subject over which that department 
of the Government has exclusive cognizance." 


The facts in this case were briefly as follows: The A. B. Dick 
Company owned the patent on a stencil-duplicating machine 

* 324 U. S. 1-73 (March 11,1912). This case was decided under the patent 
law rather than under the anti-trust law, but its bearing on the trust problem 
is sufficient to justify its inclusion. 


known as the "Rotary Mimeograph." The company sold one 
of these machines to a Miss Skou under a license restriction 
attached to the machine, which stated that the machine was 
sold by the Dick Company with the license restriction that it 
might be used only with the stencil paper, ink, and other supplies 
made by the Dick Company. The defendant, Sidney Henry, a 
dealer in ink, sold to Miss Skou for use on the machine a can of 
ink not made by the Dick Company; and this with knowledge of 
the license restriction and with the expectation that it would be 
used in connection with the mimeograph. The Dick Company 
brought suit against Henry, alleging that the patent on the 
mimeograph had been infringed by the breach of the conditions 
upon which the patented machine was sold; and sought an 
injunction against indirect infringement by Henry. 

The Court rendered a judgment in favor of the Dick Com- 
pany. The patent laws, the Court pointed out, grant to the 
inventor the exclusive right to make, use, and sell the invention; 
and each of these is a separable right. Thus, one person may be 
permitted to make, but not to sell or use, the patented article. 
Another may be permitted to sell, but within a limited area, or 
for a particular use. A third may be permitted only to use the 
patented article. While an absolute and unconditional sale of a 
patented article operates to place it beyond the boundaries of the 
patent, and thus places the piu'chaser in possession of the article 
to do with as he pleases, the owner of the patent, imder his right 
to exclusive use of the patented article, may pass the property 
right to a purchaser under license restrictions which will give him 
the right to use the machine only for specified piuposes or at 
specified places. This is because a patent monopoly gives the Ap- 
arate rights of manufacture, sale, and use. When, therefore, a 
patentee makes and sells a patented device, the extent of the li- 
cense to use, which is carried by the sale, depends on whether any 
restriction was placed on its use, and brought home to the person 
acquiring the article. The Court held that it was clear from the 
license restriction adopted in this case that while the property in 
the machine passed to the purchaser, the sale carried with it only 
the right to use the invention according to the terms of the 


license; and among these terms was the use of ink made by the 
Dick Company. 

The Court then turned to an examination of the nature of 
the restrictions that might be lawfully imposed on a purchaser 
of a patented article. It declared that it would construe the 
patent law as granting a monopoly in order to subserve a broad 
public policy, — the encouragement of invention. It referred 
with approval to the Bement case.^ In that case it was held that 
a contract in regard to the use of a patent, even though it re- 
strained interstate trade, did not fall within the prohibitions of 
the Sherman Act, if it involved only the reasonable and legal 
conditions imposed under the patent law. But, it was argued, to 
permit the seller to restrict the buyer to a use of the mimeograph- 
ing machine in connection with ink made by the patentee would 
give the latter the power to extend his monopoly so as to embrace 
articles not within the patent. To cite one of the suggestions 
pressed upon the Court, it was said that a patentee of a coffee pot 
might sell on the condition that the pot be used only with coffee 
bought from him. While granting that competition in the sale of 
ink, coffee, etc., might be slightly affected by such restrictions, 
the Court held that these illustrations failed to show marked 
inconvenience to the public, since the public was always free to 
take or refuse the patented article on the terms imposed. If the 
terms were too onerous, the patented article would not find a 
market; and the public, by permitting the invention to go un- 
used, lost nothing which it had before. When the patent expired 
the public would be permitted to use the invention without 
compensation or restriction. " It must not be forgotten," said ' 
the Court, "that we are dealing with a constitutional and statu- 
tory monopoly. . . . We are not at liberty to say that the 
Constitution has unwisely provided for granting a monopolistic 
right to inventors, or that Congress has unwisely failed to impose 
limitations upon the inventor's exclusive right of use. And 
if it be that the ingenuity of patentees in devising ways in which 
to reap the benefit of their discoveries requires to be restrained. 
Congress alone has the power to determine what restraints shall 

* See p. 398. 


be imposed/* (In 1914, as a part of the anti-trust legislation of 
that year, Congress acted upon this suggestion; and in section 
three of the Clayton Act specifically forbade such restrictive sales 
' as the Supreme Court had upheld in the Dick case). * 

From the opinion in the Dick case Chief Justice White and 
Justices Hughes and Lamar dissented. Inasmuch as the case was 
ai^ed after the death of Justice Harlan and dining the absence 
of Justice Day, the decision was 4 to 3. 

Subsequently — ^after the passage of the Clayton Act — the 
Supreme Court in the Motion Picture Patents Company case 
said: " Under the patent law the grant by patent of the exclusive 
right to use, like the grant of the exclusive right to vend, is 
limited to the invention described in the claims of the patent, 
and that law does not empower the patent owner by notices 
attached to the things patented to extend the scope of the patent 
monopoly by restricting their use to materials necessary for their 
operation but forming no part of the patented invention, or to 
send such articles forth into the channels of trade subject to 
conditions as to use or royalty, to be imposed thereafter, in the 
vendor's discretion."^ By this decision Henry v, Dick was 
definitely overruled. 


This case is significant since it ill ustrates the " ?i^^^ntair^ " 
that^ay rf^ii1f_J rom the a doption of th e Courtis "rule of 
reason." It was the fi ret casel rnffWcITtb e Court hdd that a 
/63mbin ation which was illegal be cause in un j;^ sonable restramt 
of trad e might, by a mod jfication of its provisions, becom e a 
lawful combina tion. The decision was unanimous, although 
Justice Holmes did not participate in the hearing of the case. 

The geographical and topographical conditions at St. Louis 
are unusual. On the east lies the Mississippi river, which con- 
stitutes quite an obstacle to railroad communications. The 
cost of constructing a bridge over the river is so great that the 
railroads have not endeavored to build their own bridges, but 

* Cf. p. 361. * 243 U. S. 502 (April 9, 191 7). 

• 224 U. S. 383-413 (April 22, 191a). 



each has made use of a toll bridge, — open to all railroads. From 
the west access to the city is almost as difficult. The city is 
located on hills which approach close to the river bank, and it 
was found necessary to tunnel these hills in order to connect the 
dty with the valley of Mill creek, where the roads from the west 
had their termini. Gradually the Terminal R^^l r^^ Agc/v-^Qfjpn 
of St, Loiiia. ^quired the several independent terminal co m- 
which mini stfi^f^ tr> thp xxmh^j;, nf diflffrf nt g^^^ oi rail- 
roads, unti lfinally it was p ractically impossible for any railroad 
to pas&4Ifough, or even enter, St. Louis without using the facili- 
ties controlled by this company! 

The question before-^e Court wasi whether this unification 
of the terminal facilities was a combination in restraint of trade - 
within the meaning of the Sherman Act. The Court held that 
the mere combining of several independent terminal systems ' 
into one was not necessarily a restraint upon interstate com- 
merce; a unified terminal system open to all on equal terms might ^j 
be of the greatest public utility, particularly in a city like St. 
Louis. The question was w^P^b^r thig parti cular termi ngtl as- 
sociation was unreasonab le. The Court held that it was. In the 
first place,The association was controlled by fourteen of the 
twenty-four railroads which converged at St. Louis, while the 
other ten had no stock interest in it. And no railroad might be- 
come a member of the terminal association without the unani- 
mous consent of the fourteen proprietary companies, as they were 
called. While cotmsel for the terminal company claimed that 
no company which appUed would be refused joint use or owner- 
ship of the terminal company, the fact was that the requirement 
of unanimous consent still remained. It was also true that the 
terminal company paid no dividends, and disclaimed any inten- 
tion of ever pa3dng any; and that the non-proprietary railroads 
were permitted to use the facilities of the terminal company 
upon paying the same charges as were paid by the proprietary 
companies. But, said the Court, there is no provision guaran- 
teeing them this privilege. It may also be true, said the Court, 
that the proprietary companies have not availed themselves 
of the full measure of their power to impede the free competition 



of outside companies, yet it objected to the fact that the com- 
panies outside the terminal association were imder compulsion 
to use the terminal system, yet had no voice in its control. The 
Court therefore found the terminal company to be an unreason- 
able restraint of interstate commerce. 

The government had asked for the dissolution of the terminal 
company and the apportionment of its business among the three 
leading component parts. As matters had stood prior to the 
enunciation of the rule of reason, it is likely that the petition 
of the government would have been granted. But the Court 
now held that if thfi^ifinninaJ-assQciationwere to become the 
bona pdc agent o Levery railroad thf^^t n?;^ its T^gjliti g if w ould 
no lo nger J je'^airTttegal.j:gstraintof trade, and that by this 
means there would be preserved for the'public the obvious ad- 
vantages of unification, thus vindicating the wise purpose of 
the statute. 



This was a suit brought by the government against sixteen 
corporate and thirty-four individual defendants. The corporate 
defendants were manufacturers of sanitary enameled iron ware, 
such as bath tubs, wash bowls, drinking fountains, sinks, and 
closets. Up to about 1910 they were in competition with each 
other, but the government alleged that they had then estab- 
lished a combination controlling 85 per cent of the country's 
output of enameled iron ware. 

The process of enameling consisted in sifting enameling powder 
upon iron ware brought to a red heat. The high temperature 
fused the powder, and there was thus formed on the utensil a 
hard, impenetrable, insoluble, and smooth surface. There 
were a number of patents covering the application of the powder, 
but the best one was owned by the Standard Sanitary Manu- 
facturing Company, which manufactured some 50 per cent of 
the enameled iron ware. For some time this company refused 
to license any other manufacturer to use its invention, but 

^ 226 U. S. 20-52 (November 18, 191 2). 


finally it seems to have become convinced that the market for 
its products was being damaged through the production of 
inferior ware imder other patents. Accordingly it was agreed 
that this company, and the Mott Iron Works, and L. Wolff 
Manufacturing Company, owners of the other leading patents, 
would for a nominal consideration assign their patents to one 
Mr. Wayman, secretary of an association of enameled ware 
manufacturers, subject to re-assignment after two years upon 
demand by the owner of the patent. Mr. Wa)anan was then to 
license the various manufacturers to use these patents. The 
form of the license agreements was determined by a committee, 
and in the sunmier of 19 10 sixteen manufacturers of enameled 
iron ware signed license agreement papers. 

The license agreements entered into by the manufacturers /\ 
provided that the licensee (the -manufacturer) might use the 
patents held by Mr. Wayman by paying a royalty of $5.00 per 
day for each furnace operated. The agreements established a 
scale of prices which the licensee agreed to maintain; and con- 
tained provisions whereunder changes in prices might be made 
from time to time. Manufacturers complying with the agree- J 
ments were to receive back at the end of each month 80 per cent 
of the royalties paid by them. 

In addition, the jobbers were brought into the combination. 
The jobbers agreed tojo aintain th e resale prices as fixed from 
time to time, aiiSTiot to handle the goods of no n-licensed manu- 
facturers, except uponthe written pennissionorT!Te~ticensor. 
A breach of any of the conditions of the agreement subjected 
the contract and all unfilled orders to cancellation, involved a 
forfeiture of the rebates that the jobbers received for comply- 
ing with the agreement, and further a forfeiture of the power to 
obtain from licensed manufacturers any ware manufactured 
under the patents. 

The government claimed that this scheme was an attempt 
to conceal an agreement fixing prices under the guise of a licens- 
ing arrangement for the use of patents; that behind the "grinning 
mask" of the license agreement was the common, vulgar type of 
monopoly which had many times been condemned by the Court 


as dangerous alike to individual liberty and public well-being.' 
The defendants denied these allegations, and relied in large 
measure on the privileges accorded by the patent laws. 

The Court in an unanimous opinion said: ''The agreements 
clearly . . . transcended what was necessary to protect the use 
of the patent or the monopoly which the law conferred upon it. 
They passed to the purpose and accomplished a restraint of 
trade condemned by the Sherman law. It had, therefore, a pur- 
pose and accomplished a result not sknun ^ in the BemetU 
Case. . . . Rights conferred by patents are indeed very definite 
and extensive, but they do not give any more than other rights 
an universal license against positive prohibitions. The Sherman 
law is a limitation of rights, rights which may be pushed to evil 
consequences and therefore restrained." 

TTMTTirn^fSTAT].;^^ fi py^Annanj^jtfp^My; TEMPLE IRON COMPANY 

This was a biiyoequi^^filedJiy^ Ae^ovenimentto dissolve the 
anthr^dtecoal combiniation.^ The original defendants in the 
suit may beBTvTded into three groups: (i) the Reading Company 
(a holding company); (2) the Philadelphia and Reading Rail- 
way and five other anthracite railroads; and (3) the respective 
coal companies of the railroads, including the Temple Iron 
Company, jointly owned by the six defendant carriers. The 
Government claimed that there existed between the defendants 
a general combination formed to restrain competition in the pro- 
duction, sale, and transportation in interstate commerce of an- 
thracite co&l. It contended that this general combination was 
established: first, by evidence of an agreement among the car- 
rier defendants to apportion among themselves according to a 
scale of percentages the total output of coal transported from 

* 226 U. S. 7gryy> 

* Italics supplied by the author. 

* 23(i U. S. 324-373 (December 16, 191 2). Justices Day, Hughes, and 
Pitney took no part in thb decision. 

* For a detailed account of this combination see the author's '^Tbe Anthra- 
cite Coal Combination in the United Sutes." 


the mines to tidewater; second, by a combination, through the 
instrumentality of the Temple Iron Company, to prevent the 
construction of a new and competing line to tidewater; third, 
by a combination to buy, according to a series of identical con- 
tracts, the coal produced by the independent operators, thus 
preventing competition between the coal produced by the de- 
fendants and that produced by the indep>endents; and, fourth, 
by certain contributory combinations, participated in by cer- 
tain of the defendants, including the purchase by the Erie of the 
New York, Susquehanna and Western and of the Pennsylvania 
Coal Company (with its allied railroads), and the acquisition 
by the Reading Company of a majority of the stock of the 
Central Railroad of New Jersey. 

"The case,*' said the Court, "is barren of documentary evi- 
dence of solidarity," ^ and therefore the fact of a general com- 
bination, if it exists, must be deduced from specific acts or trans- 
actions in which the companies have united, and from which a 
general combination may be inferred. The first charge was 
that the general combination was established by the agreement 
entered into between the carriers in 1896 to distribute, according 
to a definite scale of percentages, the tonnage of anthracite 
shipped from the coal regions to New York Harbor. The Court 
pointed out that the limited character of the coal field invited 
such agreements, and that it was probable that there was a 
conference in 1896 as charged; but it held that the scheme, if 
attempted (which was not proven), had been abandoned long 
before the bill was filed, and that the government had there- 
fore failed to show any contract or agreement for the distribu 
tion of tonnage. 

The second step in the carrying out of the illegal combination 
was alleged to be the combination of six anthracite carriers 
through the Temple Iron Company to prevent the construction 
of the New York, Wyoming and Western Railroad, — a proposed 
independent line to tide-water.^ Through the Temple Iron 

> 226 U. S. 344. Italics supplied by the author. 

* For details see the author's The Anthracite Coal Combination in the 
United States, pp. 74-32. 


Company, owned by the six defendant carriers, the collieries 
of the principal supporters of the new road were purchased, and 
the New York, Wyoming and Western, to use the Court's 
language, was ''successfully strangled/' This combination 
the Court held to be illegal. It pointed out that the Temple 
Iron Company "has been and still is an eflScient agency for the 
collective activities of the defendant carriers for the purpose of 
preventing competition in the transportation and sale of coal 
in other States. . . . Through it, the defendants, in combina- 
tion, may absorb the remaining output of independent pro- 
ducers." The Court held that the board of directors of the 
Temple Iron Company, "composed as it is of men representing 
the defendants, supplies time, place and occasion for the e]q)res- 
sion of plans or combinations requiring or inviting concert of 

The third charge was that the defendants and a number of 
the independent operators had entered into contracts, containing 
substantially uniform provisions agreed upon beforehand by 
the defendant carriers in concert, whereby the independents 
agreed to deliver to the railroad coal company with which the 
contract was negotiated all the coal thereafter mined by them in 
return for a definite percentage of the average selling price of 
coal at tidewater points at or near New York City.^ It was 
further charged that the price paid was more than the operator 
could get if he attempted to market his coal independently, 
and that the difference was the sum paid for the privilege of 
controlling the sale of the independent output. 

The Supreme Court sustained these charges of the govern- 
ment, and declared the percentage contracts illegal. It recited 
the persistent attempts of the coal operators not connected 
with the railroads to gain an independent outlet to tidewater, — 
attempts which offered a constant menace to the monopoly 
of transportation enjoyed by the defendants. The obvious 
solution from the standpoint of the defendants was to tie up 
the independent operators by means of perpetual contracts for 

* For the details as to these "percentage" contracts see the author's "The 
Anthracite Coal Combination in the United States," pp. 87-97. 


the sale of their coal. The Court said that it was not surprised 
that the railroads were willing to offer unusually favorable 
terms, as the perpetual contracts would remove forever the 
m inducement to the entry of competing lines of anthracite car- 
riers, and would remove, also, the coal of the independents from 
competition with the coal of the defendants. To suppress com- 
petition through the percentage contracts would require, how- 
ever, concerted action, as the attempt of a few to secure the 
independent coal would have been resisted by the others. The 
Court held that the defendants had thus acted in concert, 
and that the contracts were therefore unlawful, even though 
singly they might not have been in restraint of trade. 

The final charge was that the purchase of the New York, 
Susquehanna and Western and the Pennsylvania Coal Company 
by the Erie, and of the Central of New Jersey by the Reading 
Company, were illegal. This charge was dismissed by the Court. 
It held that it did not appear from the record that any one of 
these three transactions was the result of any general combina- 
tion between all of the defendants, and if they did not constitute 
any part of a general plan or combination entered into by all 
the carrier companies, their separate consideration as inde- 
pendent violations of the law was not admissible under the 
general frame of the bill. As to the legality of these three minor 
combinations the Court expressed no opinion, but directed 
that the bill, in so far as it sought relief against them, be dis- 
missed, without prejudice to the bringing of a new action. 


This was a criminal prosecutio n brought against Mr. James A. 
Patte n, charging \n'nlntinn ftf tht Shpmnan Act through the es- 
taJ>lishm ent of a come r in cotton. It presented the question, to 
use the Court's language, whether a conspiracy to run a comer 
in the available supply of a staple commodity, such as cotton, 
normally a subject of trade and commerce among the states, 
and thereby to enhance artificially its price throughout the 
country, was within the terms of section one of the Anti-trust 

* 226 U. S. 525-544 (January 6, 1913). 


Act The Circuit Court had held that it was not, and for three 
reasons: first, that the conspiracy did not belong to the class in 
which the members, engaged in interstate trade, agreed to sup- 
press competition among themselves.' But the Supreme Court 
held t hat section one, on w hich the c ounts w ere founded, related 
not solely to voluntary restraints, such as resulted when persons 
engaged in interstate trade agreed to ^snppri^ss minpQtjfini^amnnfr 
themselves, but related as well to involuntary restraints, such as 
resu lteJw hen persons nOTbu eiiga^^^conspir^jOj:<fflapel action 
by.jitl;i ers, or to c reate artifi aal c(md itions^_ which necessarily 
impeded or burdened tHTclue^ourse of such trade or restricted 
the common liberty to engage IHerein. 

The Circuit Court had held, second, that running a comer, 
instead of restraining competition, tended, temporarily at least, 
to stimulate it. With respect to this point the Supreme Court 
said, '^It may well be that running a comer tends for a time to 
stimulate competition; but this does not prevent it from being 
a forbidden restraint, for it als p op erates to thw art the ug ual 
opera tion of th e laws of suppl y and demand, to withdraw the 
commodity fromThe normal current of trade, to enhan^ the 
price artificially, to h^nperjisers and consumers in satisfying 
thelTneeds, and to produce praclieally^e'same^evils as does 
the suppression of competition." 

Third, the Circuit Court had held that the obstmction of inter- 
state trade resulting from the operation of the con^iracy, even 
although a necessary result, would be so indirect as not to be a 
restraint in the sense of the statute. The Supreme Court in 
analyzing this claim outlined the salient features of the con- 
spiracy. It was, it said, a conspiracy to run a comer in the 
market. The commodity to be cornered was c^otton, a product 
of the sou them states,"mainly used In Ihe northem states, and 
therefore necess arily the subject of interstate commerceT* The 
comer was to be conducted on the Cotton Exchange in New York 
City, but by means that would enable the conspirators to ob- 
tain control of the available supply, and to enhance the price to 
all buyers in every market of the country. Upon the corner 

» i88 Fed. Rep. 664-673. 


becoming effective, there could be no trading in the commodity 
save at the will of the conspirators, and at such price as their 
interests might prompt them to exact. The conspiracy was thus 
to bring within its dominating influence the entire cotton trade 
of the country. Such being the nature, object, and scope of the 
con^iracy it was plain that by its necessary operation it would 
directly and materially impede the due course of commerce 
among the states, and therefore inflict upon the public the in- 
juries which the Anti-trust Act was designed to prevent.^ 


This was a criminal proceeding brought against the president 
of the United Shoe Machinery Company and others, charging 
them with forming a combination in restraint of trade and with 
forming a conspiracy. The alleged facts were substantially 
as follows: Practically all the shoes worn in the United States 
are made with the aid of lasting machines, welt-sewing machines, 
outsole-stitching machines, lieeiingmachines, and metallic- 
fastening machines. Up to February 7, 1899, the Consolidated 
and McKay Lasting Machine Company made 60 per cent of the 
lasting maduQ^; the Goodyear Shoe Machinery Company 
made 80 per cent of the wp]l t-<tf*w'"g and (^"t^lp^stjtrhinpr ma- 
chines, and 10 per cent ofTfielasting machines; and the McKay 
Shoe Machinery Company made 70 per cent of the heeling ma- 
chines, and 80 per cent of the metallic-fastening macHines. 
On Tebruary 7, 1899, these thr^_£OTa[X)anies_organized the 
United Shoe Machinery Company to unite the businesses 
formerly sef^;^Ji^^CQnXroliea, The brganlzalion of the United 
Shoe Machinery Company and its acquisition of the stocks and 
business of these companies was alleged to constitute a breach 
of the Sherman Act. 

The opinion of the Coiut was unanimous and brief, being 
embraced in less than four pages. It is to be observed, said the 
Coiut, that the conditions now inserted in the leases of shoe 

^ From this opinion Chief Justice White and Justices Lurton and Holmes 

* 227 U. S. 202-218 (February 3, 1913). 


machinery to shoe manufacturers are not alleged to have been 
contemporaneous with the combination, or to have been contem- 
plated when it was made. The District Court construed the 
indictment as confined to the combination of February 7 without 
regard to the leases subsequently made, and we have no jurisdic- 
tion to review this interpretation of the indictment. The valid- 
ity of the leases or of a combination contemplating them is there- 
fore not before us. 

The question to be decided, said the Court, is whether the 
combination taken by itself was within the penalties of the 
Sherman Act. Thus limited the question did not require much 
discussion. On the face of it the combination was merely an 
attempt to secm-e greater eflSdency. The business of the several 
companies that combined, as it existed prior to the combination, 
is assimied to have been legal. The machines are patented, 
making them a monopoly in any event; and it may be assumed 
that the success of the several companies was due to their patents 
having been the best. As, by the interpretation of the lower 
court and by the admission in argument before us, these com- 
panies did not compete with one another, it is difficult to see 
why the collective business should be any worse than its com- 
ponent parts. We can see no greater objection to one corpora- 
tion manufacturing seventy per cent of three noncompeting 
groups of patented machines collectively used for making a 
single product than to three corporations making the same pro- 
portion of one group each. The disintegration aimed at by the 
statute does not extend to reducing all manufacture to isolated 
units of the lowest degree. The case was therefore dismissed. 


The government instituted suit against the United Shoe 
Machinery Company on December 12, 1911. It chained a 
combination of manufacturers of shoe machinery, and it specif- 
ically attacked certain leases of the company which were as- 
serted to be the means whereby competition in the manufacture 

' 247 U. S. 32-^1 (May 20, 1918). 


of shoe machinery was restrained.^ The defendant claimed that 
it had merely combined noncompeting businesses; and that the 
leases were but the exercise of undoubted patent rights. The 
District Court dismissed the bill, whereupon the government 
appealed to the Supreme Court.^ This body in an opinion ren- 
dered on May 20, 1918, upheld«the decision of the lower court 
by a vote of four to three Qustices McReynolds and Brandeis, 
having been connected with suits against the company, being 
debarred by professional ethics from participation in the case). 

The charge of the government was two-fold: first, that the 
United Company had effected a combination of competing con- 
cerns engaged in the manufacture of shoe machinery in violation 
of sections one and two of the Sherman Act; and, second, that it 
had entered into leases with shoe manufacturers which extended 
the control achieved by the act of combination. With respect to 
the first contention the Supreme Court held that the companies 
that united to form the United Shoe Machinery Company were 
complementary, not competitive. It admitted that the testi- 
mony was conflicting, and might lead to a different conclusion; 
but it accepted the verdict of the lower court that there was no 
practical competition among these companies. It decided 
likewise as to the companies acquired after the organization of 
the combination in 1899. These acquisitions, it held, did not 
remove competition "in any practical or large sense." 

Under this interpretation there was obviously no occasion to 
dissolve the United Shoe Machinery Company. It was undoubt- 
edly a trust, since it represented the union of a group of concerns 
monopolizing various branches of the shoe machinery business, 
fiut it was not an illegal trust, since the constituent companies 
were patent monopolies, protected by law; and since, not being 
competitive with each other, there was no bar to their combina- 

With respect to the leases and their tying clauses the Coiu*t 
held that they were simply the exercise of the company's right 
as a patentee. The leases perhaps restrained the trade of com- 

' For an account of the United Shoe Machinery Company, see ch. 8. 
• 222 Fed. Rep. 349-415. 


peting manufacturers of shoe machinery, but this was of the 
nature of a patent. The very strength of a patent consists in the 
right it gives to exclude others from the use of the invention or to 
permit them to use it on terms imposed by the patentee; and its 
employment in this manner was not necessarily an offense 
against the Anti-trust Act. The Court pointed out that the 
patents did not permit unlawful restraints, such as were em- 
ployed by the Standard Sanitary Manufacturing Company; 
but the leases of the United Shoe Machinery Company were not 
of that nature. They were bargains based on patent rights, 
agreed to by the lessees, and entitled to the sanction of the law. 

In a dissenting opinion (concurred in by Justices Day and 
Pitney) Justice Clarke declared that some of the companies 
originally combined in the United Company were competitive; 
that this was established by the testimony of the organizers. 
These individuals, knowing precisely what they hoped to accom- 
plish, had rejected a "harmonious arrangement" or a "working 
agreement" from an idea that "it might be deemed to be a 
combination in restraint of trade," but to accomplish the same 
end had adopted the scheme of mei^er, later condemned by the 
Supreme Court in the Tobacco case as a mere subterfuge of form. 
Justice Clarke vigorously protested against deciding the case 
upon refined distinctions as to the application of the patent 

In a separate dissenting opinion (concurred in by Justices 
Clarke and Pitney) Justice Day attacked particularly the 
majority opinion sustaining the tying clauses in the leases. 
Referring to Straus v, American Publishers' Association, in which 
the Court had held that the patent statute was not intended to 
authorize agreements in unlawful restraint of trade and tending 
to monopoly, in violation of the specific terms of the Sherman 
law,^ he declared that it was apparent from a mere statement of 
the terms of the lease restrictions that they tended to monopolize 
an important trade in interstate commerce. To sustain the 
provisions of the leases he regarded as a grant of authority to 
holders of patented inventions to build up monopolies in direct 

^231 U. S. 234. 


violation of the Sherman Act, under the gxiise of leasing the use of 
patented machinery. 


The organization of the harvester trust has been described in 
chapter X. In 191 2 the government instituted suit under the 
Sherman Act, asking for the dissolution of the company. The 
Circuit Court decided in favor of the government on August 12, 
1914. The company appealed to the Supreme Court, but be- 
fore a decision was rendered it withdrew its appeal, and accepted 
the decree of the lower court. The nature of the dissolution 
agreed upon will be described in chapter XVIII; at this point 
merely the decision of the Circuit Court will be outlined. 

The Circuit Court, Judge Sanborn dissenting, held the Inter- 
national Harvester Company to be a combination in unreason- 
able restraint of trade. Three separate opinions were rendered. 
Judge Smith, after reviewing the facts and pertinent decisions, 
said that while there was no limit imder the American law to 
which a business might not independently grow, and while even 
a combination of two or more companies was not illegal if it did 
not unreasonably restrain trade, yet when 80 to 85 per cent of tht 
business was combined, and by the combination all competition 
was eliminated between the members thereof, the resulting 
restraint of trade was unreasonable. He therefore ordered the 
harvester trust dissolved. 

Judge Hook concurred in the foregoing opinion. He said in 
part: "The International Harvester Company is not the result 
of the normal growth of the fair enterprise of an individual, a 
partnership or a corporation. On the contrary, it was created by 
combining five great competing companies which controlled more 
than 80 per cent, of the trade in necessary farm implements, and 
it still maintains a substantial dominance. That is the con- 
trolling fact; all else is detail." 

Judge Sanborn dissented at considerable length. He dissented 
because in his opinion the crucial issue was not whether in 1902 
the International Harvester Company had established a combi- 

* 214 Fed. Rep. 987-1012. 



nation in restraint of trade, but whether in 191 2, when the suit 
was brought, it was then imreasonably restraining or monopoliz- 
ing trade, or threatening to do so; and because the evidence in 
the case had convinced him that the company was not then and 
had not for at least seven years previous to the commencement of 
the suit been restraining or threatening to restrain trade unduly. 
The criterion of " unreasonable" restraint he held to be a restric- 
tion of competition that unduly injured the public by (i) raising 
the prices of the articles, or (2) limiting their production, or 
(3) deteriorating their quality, or (4) decreasing the prices paid 
for the labor or materials required to produce them, or (5) 
oppressing competitors; and the evidence established, he main- 
tained, that the company had not been guilty of any of these 
practices. He therefore favored the dismissal of the suit with- 
out prejudicing the right of the government to institute similar 
proceedings whenever the company committed any acts in 
violation of the Sherman law. 

The Harvester case was thus a highly significant one, since 
it dearly presented to the courts the question whether the Sher- 
man Act forbids combinations that hold a dominant or prepon- 
derant position in the industry, entirely apart from the manner 
in which they exercise their vast power; or whether it merely 
forbids such combinations when they abuse their power, as, for 
example, by advancing prices, limiting the supply, lowering the 
quality, reducing wages, or oppressing competitors. To^tate it 
somewhat differently, the Harvester case involved a determina- 
tion of the question whether the Sherman Act forbids all trusts, 
or merely the " bad " trusts; for the International Harvester Com- 
pany was a "good " trust, if there were any such. It is therefore 
much to be regretted that through the force of circumstances a de- 
cision of the Supreme Court on this vital matter was not obtained. 


On March i, 1913, the government filed a petition against the 
Com Products Refining Company, asking that it be adjudged 

* 234 Fed. Rep. 964-1018. A study of the glucose trust is in Dewing, 
Corporate Promotions and Reorganizations, ch. 4. 


to be a combination in restraint of trade and an illegal mo- 
nopoly. The decision of the District Court sustaining the 
government, and granting the relief prayed for, was rendered on 
June 24, 1916. The company appealed, but subsequently with- 
drew its appeal. The decision of the lower court was thus 

With regard to the law the Coiul, referring to the Harvester 
case, agreed that it was an open question whether the test of 
illegality under the Sherman Act was to be found only in the 
combination of enough producing capacity to control supply and 
fix prices, or whether it must also be proven that the combination 
had used its power to the injury of the public; but it expressed 
the opinion that the t est was the power, and not its exerci se. In 
the case of the Com Products Refining Company, however, this 
question was held to be academic, since the company was illegal 
under either test. The company by t he combination in 1906 had 
acquired contr ol of all the glucose plants in the country, and of 
p lants m aking about 64 per cent of the output of starch; and had 
manif ested a "continuous and deliberate purpose . . . by every 
device which their ingenuity could discover, to maintain as 
completely as possible their original domination of the industry." 
I t thus h ad the power — diminished, to be sure, since 1906, yet 
still th e power — to restrain trade; and it had steadfastly used it 
in an illegal manner. 

le issue was therefore as to the remedy. The necessity of 
an injunction to restrain the company from employing in the 
future those unfair practices that had hampered independent 
enterprise in the past was held to be clear; and the court there- 
fore specifically forbade the resort to low-price campaigns, bogus 
independents, price agreements, and the like. As to the advisa- 
bility of a dissolution the Court was not so certain, but it decided, 
in view of the "inveterate and incorrigible" insistence of the 
company* upon interfering with freedom of commerce, to pre- 
scribe also the more drastic remedy. The Coiu't did not indicate " 
what the form of the decree would be — the plan was to be filed 
with the Federal Trade Commission, as permitted by the Trade > 
Commission Act — ^but it stated that it -would be similar to the 



Harvester decree, and it implied that no dissolution would be 
satisfactory that left as much as 60 per cent of the trade in the 
hands of one company.* 


The organization of the United States Steel Corporation has 
been discussed in chapter IX. In October, 191 1, the govern- 
ment brought suit against the company, asking that it be dis- 
solved on the ground that it was engaged in an illegal restraint of 
trade, and was a monopoly. In a decision rendered on June 3, 
1915, the District Court judges unanimously dismissed the bill, 
though they disagreed as to the grounds for the dismissal.* The 
decision of the Supreme Court came on March i, 1920. Four 
judges found for the Steel Corporation, three against, and two 
did not participate, one having as Attorney General been as- 
sociated with the proceeding against the Corporation, and the 
other as a private citizen having expressed the opinion that the 
Corporation was illegal and uneconomic. It is probable, there- 
fore, as in the Shoe Machinery case, that the decision of the 
Court did not represent the opinion of the majority. 

The Supreme Court after reviewing the decisions of the 
judges of the lower court held that it was clear that while there 
might be two opinions as to the purpose of the organizers of the 
Steel Corporation, there was no doubt that the Corporation had 
never possessed, and did not then possess, a monopoly. And it 
was against monopoly that the Sherman Act was directed; not 
against the expectation thereof, but against its real